{"id":4136,"date":"2020-02-13T10:00:50","date_gmt":"2020-02-13T18:00:50","guid":{"rendered":"https:\/\/berkonomics.com\/?p=4136"},"modified":"2020-02-06T11:18:04","modified_gmt":"2020-02-06T19:18:04","slug":"warning-contractors-must-really-be-independent","status":"publish","type":"post","link":"https:\/\/berkonomics.com\/?p=4136","title":{"rendered":"Warning: Contractors must really be independent!"},"content":{"rendered":"

Our challenge is getting more difficult<\/strong><\/p>\n

How many of us have \u201chired\u201d independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS?\u00a0 Or separately the State of California? \u00a0I\u2019ve experienced the results of a wrong decision, and the IRS and state agencies are not forgiving in their pursuit of penalties, interest and most damaging, assessing a company with the on both employer and employee taxes when reclassifying the person as an employee.<\/p>\n

IRS penalties for getting it wrong<\/strong><\/p>\n

Yes, that\u2019s right. The company must pay the employee\u2019s portion of the taxes (and penalties\"\" on these) as well as paying those they would have paid if the person were an employee. \u00a0That\u2019s even more serious for today\u2019s gig workers in California being attacked by the government requiring them to be reclassified as employees.<\/p>\n

The newest IRS test <\/strong><\/p>\n

And the IRS has raised the bar on its test as to whether an independent contractor is not in reality an employee.\u00a0\u00a0 So, it is important \u2013 no really it is urgent \u2013 that we review some of the twenty \u2013 yes twenty \u2013 tests the IRS now uses to determine if a person is an independent contractor.<\/p>\n

Here are the ten IRS tests<\/strong><\/p>\n

[Email readers, continue here…]<\/em><\/span><\/p>\n

    \n
  1. Contract for service<\/u>: An independent contractor should work under a written contract with the company, defining the end result expected, time to achieve, lump sum or unit cost, ownership of intellectual property created and more.<\/li>\n
  2. Direction:<\/u> The contractor directs itself, rather than being managed as an employee. And just as important, a contractor does not supervise any of the company\u2019s employees directly. This is tricky when a contracted CFO assumes a position of directing an accounting department.\u00a0 Usually, in acceptable cases such as this, the contracted executive comes from a recognized agency with a history of paying its own employee taxes, health insurance, and other benefits.\u00a0\u00a0 Without this protection, a contracted executive is suspect, even if working with more than one company at a time.<\/li>\n
  3. Integration:<\/u> A contractor provides services which are not an integral part of the core business of the employer. This one is tricky. Is a contracted CFO an employee because the CFO job is integral?\u00a0\u00a0 How about a contractor CEO?\u00a0\u00a0 The person must pass all the other tests when one of them, such as this, crossed into the very gray zone.<\/li>\n
  4. Individual on the job:<\/u> A contractor may hire a substitute without the company\u2019s permission \u2013 although the company should then be able to terminate the contract with the contractor if the substitute is not acceptable.<\/li>\n
  5. Term:<\/u> A contractor is hired for a specific project, usually tied to a time term. An undefined period of time favors the ruling as employee.<\/li>\n
  6. Reporting:<\/u> Here is a surprise. The IRS wants to test that a contractor is NOT required to submit regular reports. Yet, most of us would want to have such documentation of progress other than an invoice.<\/li>\n
  7. Tools and materials<\/u>: The contractor must supply his or her own tools. This is tricky when a contractor sits at your desk using your computer and your phone system all day.<\/li>\n
  8. Physical facility:<\/u> The contractor must have its own \u201chome office\u201d even if in a bedroom, from which primary work is performed.<\/li>\n
  9. Works for more than one company:<\/u> If such a person works only for a single company for any period of time, that person will probably be determined to be an employee. A contractor must make services available to the general public.<\/li>\n
  10. Termination: <\/u>A contractor works under a contract \u2013 which means that an independent contractor cannot be \u201cfired,\u201d as long as results are satisfactory as defined within the contract of service.<\/li>\n<\/ol>\n

    California\u2019s \u201cABC Test\u201d for gig employees<\/strong><\/p>\n

    \"\"In California, there are still suits pending as of this writing as to whether app-based gig employees (think Door Dash, Lyft, Uber and many more) are really employees. \u00a0The state developed an \u201cABC Test\u201d which has passed a State Supreme Court challenge:<\/p>\n

    A: Companies must prove they don\u2019t control the work performed.<\/strong> Gig employers don\u2019t want to look like they control their contractors. An example is Uber where the Company does not want to look like it controls driver schedules.<\/p>\n

    B: The killer. The contractor cannot work for the core concept of the business. <\/strong>\u00a0Uber drivers state that they are doing just that, while the Company claims it is just a platform connecting drivers to riders.<\/p>\n

    C: \u00a0The contractor must establish an independent business.<\/strong> \u00a0That is hard for a Lyft driver who works only as a driver for that one company, or even one working for Uber and Lyft as some do. \u00a0This is one of the challenges courts will sort out.<\/p>\n

    Some ways around this for companies<\/strong><\/p>\n

    There are more tests, but these are the ones most often used by the IRS.\u00a0 States add a few of their own; so, beware.\u00a0\u00a0 Pay contractors using account payable systems, not payroll services.\u00a0 Pay only upon receipt of invoices, not with regularly triggered checks or transfers of uniform amounts without invoice documents to back up the payments.<\/p>\n

    Small companies want to cut cash drains<\/strong><\/p>\n

    Many small or early stage company CEOs look for opportunities to cut cash drains, knowing that payroll is usually the greatest cash drain of all. The temptation to reduce that by fourteen percent or more by classifying a gray area employee as a contractor is very high.\u00a0 And that includes self-payments to a founder.<\/p>\n

    How about founders?<\/strong><\/p>\n

    Founders working for a company are employees if they take regular payments, subscribe to company benefits, attend regular company meetings, or fail any of the tests above.\u00a0 The temptation to just draw cash and call it a loan or document a year\u2019s withdrawals with a 1099 is great, but highly risky.<\/p>\n

    The danger of an IRS tax bill reaching back years<\/strong><\/p>\n

    There is nothing worse than a large tax bill and threats of a government agency seizing a cash account when a company cannot or does not respond with proper documentation or payment.\u00a0 And even a single year\u2019s worth of transgressions, when added into a single tax bill with penalties and interest, can appear daunting to small and young companies.<\/p>\n

    Management discipline and liability<\/strong><\/p>\n

    Like payment of payroll taxes by incremental impound each pay period, as opposed to waiting until the last minute and making manual tax payments, it is a proper discipline of management to \u201ctake the hit\u201d incrementally to protect the business from a catastrophic failure to pay a governmental agency any form of tax when and as due.\u00a0\u00a0 Need we emphasize the personal liability of management AND the board of directors attached to tax payments?<\/p>\n

    Good management takes discipline and enough knowledge to prevent these possibly crippling errors in judgment that stem from decisions made to avoid or put off tax payments when accrued or due.<\/p>\n

     <\/p>\n","protected":false},"excerpt":{"rendered":"

    Our challenge is getting more difficult How many of us have \u201chired\u201d independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS?\u00a0 Or separately the State of California? \u00a0I\u2019ve … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[8,1,20],"tags":[],"class_list":["post-4136","post","type-post","status-publish","format-standard","hentry","category-depending-upon-others","category-general","category-protecting-the-business"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/4136","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4136"}],"version-history":[{"count":0,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/4136\/revisions"}],"wp:attachment":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4136"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4136"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4136"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}