Many detail shops have big problems classifying their employees correctly. Why? Mainly because some shop owners try to save a few bucks on the taxes paid for employees. So they think they can pull a fast one and pay their employees cash under the table. Even worse, some shop owners will tell their workers that they are “independent contractors” and just cut them a check each week. Either way, both methods are illegal. This behavior is the reason there are so many looming IRS problems for small business detail shops in this country. What’s worse is you hurt the people working for you. And you make the entire industry look like fly by night operators when you get caught.
Shady Independent Contractor Classification
Let’s elaborate more on the larger issue of paying employees by check as an independent contractor. Whether you pay your employees cash or by check with no taxes taken out, it’s essentially the same issue as far as the IRS and state tax collectors are concerned. So what exactly am I talking about here? I’m addressing the issue of shop owners who pay their pay their employees by cash or check and issue a 1099 at the end of the year. This is what we call the shady independent contractor classification.
Why do they issue a 1099? Well, because the shop owner wants to get the best of both worlds. Basically the typical shop owner who behaves like this doesn’t care what happens to their employees. So they will pay them straight time for hours worked or a per car rate. Then they cut them a check. The shop owner then sells it to the employee by pointing out that they are making more money because there’s no taxes deducted from their “paycheck”. This is all bullshit and a major contributor to these looming IRS problems for small business detail shops across the country.
Targets for Audits and Investigations
Over the past decade the IRS has identified detail shops as targets for audits and investigations to catch shop owners conducting business this way. So when the shop owner issues a 1099 to the employee, they are attempting to transfer the employment tax obligations from their business to the employee. And the tax man knows you’re doing this because you basically announce it when you do your own taxes and deduct the payments you’ve made to these “contractors” who only work for you.
Check out our 5 reasons your 1099 contractor is actually your employee post to get some new insight into these compliance issues.
Screwing Your Employees
The shop owner is also screwing their employee in multiple ways by doing this. The employee doesn’t have a record of earnings and nothing paid into either social security or unemployment. These employees/contractors also aren’t covered by workers comp that should be provided by the shop owner.
- If the shop owner fires the employee/contractor, they get no unemployment because they haven’t paid anything into it.
- If the employee/contractor gets hurt or injured on the job, they aren’t eligible for workers comp benefits to help them get back on their feet while they are unable to work.
- If the employee/contractor works for the shop for many years, literally none of their earnings are recorded with social security. The shop owner is basically creating an awful future possible retirement fiasco for the employee. This is a horrible way to do business.
The employee might save a few bucks, but in the long run they are getting screwed. The clear winner in this situation is the shop owner who saves all the matching employment taxes, the employer contribution for unemployment insurance with the state and the workers comp coverage. This is really underhanded and actually kind of sleazy behavior. Most shop owners I know are much better than this, but sometimes you get yourself into a corner and become desperate to cut expenses any way possible. This is one of those cuts you just don’t want to make.
When You Take Care of Your People, They Take Care of You
Sorry if my comments sound harsh in regards to this, but I think shop owners who do this are really scraping the bottom of the barrel. I was able to build a multi-million dollar business and still give my workers benefits and pay them like a professional business should. And I made a nice profit doing so. When you take care of your people, they take care of you.
Exposing Your Business to Unnecessary Liability and Risk
You are also exposing your business to unnecessary liability and risk with both civil and criminal penalties for trying to pass-off your “contractor” as an employee. You also open yourself up to potential insurance fraud if you file an insurance claim and tell your insurance carrier that your employee/contractor is an actual W2 employee. Your business liability insurance only covers you and your employees from damages you cause. Your commercial auto insurance coverage also only covers you and your employees. And your garage keepers liability? Same thing, only covers employees. So the minute you lie to an insurance adjuster and tell your employee wrecked a customer’s vehicle you are committing insurance fraud. And those looming IRS problems for small business detail shops that I mentioned? The IRS can simply ask your insurance carrier for claim records to prove you tried to pass off your “independent contractor” as an actual employee.
You Could be Personally Liable for that Accident with No Insurance Coverage
And your employee’s auto coverage? Their personal insurance also won’t cover it because they were driving the vehicle while working for you. This is another way shop owners attempt to get around the insurance issue. They just tell employees that their insurance covers them while they are driving cars. Completely untrue, unless you lie. You could be personally liable for that accident with no insurance coverage as backup. So be careful how you deal with and classify your workers. If you don’t think that $10/hour employee will crack under pressure from an experienced insurance adjuster grilling them about the circumstances involving the accident, then you are in for a rude surprise.
If you are working on a customer car with a mobile operation, your auto policy doesn’t have any coverage whatsoever for the services you are performing. This is why specific small business auto detailing liability insurance coverage is so important. We cover this in more detail on our Garage Keepers/Transporter Plates page along with our Detail Shop Liability Insurance page.
Looming IRS Problems for Small Business
As business owners, we’ve got enough hassles to deal with to have the IRS and state tax collectors start piling on with more issues. I wrote “Looming IRS Problems for Small Business” to highlight this problem and make sure detail shop small business owners were aware that this is a big deal. Unfortunately, when it comes to being in business we have so many people that give us advice that isn’t necessarily accurate. I’ve talked to so many small business owners over the years that honestly believe that it’s acceptable to simply have people work for them and cut them a check for their work. They have no concept of employment taxes and the many other rules and regulations they have to deal with in order to be in compliance with the state and Federal government. Hopefully this article provides more information about why all of this is important.