Detail Shop 1099 Contractor
Are you an auto detail business owner who pays their workers cash under the table or as a detail shop 1099 contractor? I ask this simply to get an idea of how professional you are as a business owner.
If you pay cash under the table it means you and your employees are conspiring to illegally avoid paying taxes.
If you are paying with cash, then the employee most likely understands that it’s illegal and just going along with it.
Paying by check and simply writing on it ‘1099 contractor’ is a different story. Many detail shop workers have no idea that they are still responsible to pay taxes on the money you pay them because they are receiving a check from you.
And most of the time, your employee has no idea that it’s illegal. But you as the business owner definitely know better. And if you don’t, then you shouldn’t be running a business or be permitted to employ anybody.
Stupid and Illegal
Obviously you have your reasons for doing this, but if you get caught you’ve clearly already figured out what will happen. Paying cash under the table is one thing, but leaving a paper trail and writing on the check that the payment is for a 1099 contractor? Really? It’s just stupid and illegal.
And don’t misunderstand what I’m saying here. I also think paying your workers cash under the table is moronic. I’m simply pointing out that paying by check and writing 1099 on it while leaving a paper trail is taking stupidity to a new level.
Like the IRS or your state revenue office hasn’t seen that before? In thousands of other detailing businesses?
The only reason you are still getting away with cash payments or 1099 checks is that nobody in the IRS or your state tax department has caught up with you yet. But they will.
You Don’t Need to Operate Illegally
The crazy part of this is that you don’t need to operate illegally in order to make a profit as a detailing business. Hopefully, we can educate you a bit on this topic and also show you what you need to do to begin making a profit the legal way.
Many businesses in the detailing and reconditioning industry pay their workers by check and issue 1099 at the end of the year. They misclassify these workers as contractors instead of employees. That’s why I call them a ‘detail shop 1099 contractor classification”.
Paying anybody under the table is illegal and an all-around bad idea. Misclassifying these workers as 1099 contractors opens a pandora’s box of legal issues with both your state and Federal government. I honestly don’t know which one is worse because you are creating a paper trail and notifying both your state department of revenue and the IRS that you pay your workers in this manner. The IRS is fully aware that auto detail shops do this so you are just alerting them to look at you more closely. I have included the IRS criteria below for the proper classification of an independent contractor or employee.
A Simple Rule for Properly Classifying Contractors and Employees
The following information is a simple rule for properly classifying contractors and employees that work for an auto detail shop.
A contractor is a hired worker where you control the results, but everything else is up to the contractor. You simply say this is what I need, or spell it out in writing, and they go get it done.
Option A: If we’re talking about auto detailing contractors in your shop, then you would deal with the customer and arrange for their car to be at your shop. Then you hire the contractor to do the detail, as they see fit, using their own equipment and supplies. The contractor will also have their own insurance and also complete the project on their own schedule without interference from you.
Option B: So does the above scenario sound like the arrangement you have with your ‘contractors’? Or do you set your shop hours, provide the equipment they use, check their work to make sure it’s satisfactory, and then pay them for the hours they worked once the job is completed?
If you chose Option B, then you are working with employees. Your employees.
IRS Will Reclassify Your Contractors as Employees
The IRS will reclassify your contractors as employees by asking a few simple questions.
Independent Contractor vs Employee.
- How do they do their jobs? With or without direction or supervision from you?
- When do they do their jobs? Is it like a job? Do you tell them when and where to arrive and leave? If so, that’s the same as an hourly job.
- Do you provide equipment for them to use in order to do their job? 1099 Contractors have their own equipment. When is the last time you hired a painter, gave him your paintbrushes and rollers, and then supervised their painting?
- Side note: If you took issue with this specific item because you do micromanage contractors as I described above, then you are a control freak. If you wonder why contractors never come back after your project is completed, it’s because they hate you. Seek help.
- Do you train them? They are independent contractors. Emphasis on independent. That’s like hiring a plumber and teaching them how to solder pipes and unclog toilets. What’s the point?
- Do you have set hours when they need to arrive and leave? This item can go both ways since you shouldn’t have to adjust your hours to meet the needs of a contractor. You can, however, instruct a contractor that they are only permitted in your facility during certain hours. Whether or not they abide by your direction is up to them.
- Do you tell them how fast to work in order to meet deadlines? This is another item that isn’t employee-specific. If you hire a copywriter or ad agency, you can tell them when you need the project completed without making them an employee. Everybody has deadlines they need to meet.
- Do you provide supplies for them to use while detailing vehicles? This could also go both ways, but you need to ask yourself if you provide supplies day in day out for workers in your facility. Contractors usually have their own supplies.
Did you answer yes to ANY of these questions? Then you might need to consult with a legal and tax professional that can dive deeper into your situation and advise you how to proceed.
You don’t want to be surprised by a notice of audit from the IRS, your state revenue department, the department of labor, or an inspector from wage and hour.
If you do receive an audit notice or document request, you should immediately contact your lawyer and accountant to discuss it further with them.
I Didn’t Know is NOT a Defense
I always find it humorous when you see interviews with business owners and they claim to not know the law. FYI, I didn’t know is NOT a defense. The IRS doesn’t care what you do and don’t know about the law. As a business owner, you are expected to understand the rules, regulations, and laws that pertain to the type of business you own. Can you imagine a commercial truck driver with a CDL license getting stopped by the police and telling them that he didn’t know he had to obey speed limits? It’s no different being in business and not understanding the basics of how to be in business. Go sign up for classes at your local community college. Or hire a lawyer and accountant like the rest of the business world.
The IRS Might Accept Your Apology But Still Penalize You
You can apologize all you want, but the IRS couldn’t care less about you. They might accept your apology but still penalize you. Why? Because they don’t care. They can tell you to go ahead and make it right by paying ALL of the payroll taxes that both the employee and the business were required to pay for ALL the years that you did this. And then also charge penalties and interest for all the years that you did it. The unfortunate part of this is that the employee isn’t liable for those taxes, it’s all on the business owner. Even worse, if you can’t pay it or decide to shut down and declare bankruptcy, you are still stuck. Most taxes owed to the IRS can’t be eliminated in bankruptcy. So they will still come after you.The IRS always gets its money.
How do I correctly classify employees as W2 or 1099?
Here’s an idea, do the right thing and pay your employees properly with the correct classification as W2 employees. Even if you’ve been paying them as contractors for years.
Paying employees as w2’s is as easy as simply switching them to the proper classification. So do it.
You don’t want the stress of looking over your shoulder wondering when you might get caught.
Something is out of wack.
If you can’t afford to pay the taxes that are due, then your costs are too high, the pricing model you use is wrong or something is out of wack.
Your detail shop should be making enough money to pay your overhead, employees, and you. If you have to cut corners just to stay in business, then you shouldn’t be in business.
IRS Criteria for Independent Contractor vs Employee Classification
Below is the IRS criteria for independent contractor vs employee classification that the Federal Government uses. This is from the IRS website at the link below:
“Independent Contractors vs. Employees” from the IRS Web Site: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
Who is an Independent Contractor? A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Vera is an independent contractor.
Who is a Common-Law Employee (Employee)? Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Who is an Employee? A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.
Misclassification of Employees
Consequences of treating an employee as an independent contractor. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. See Internal Revenue Code section 3509 for additional information.
Proof of Insurance for Any Contractors
Another item that both Federal and State labor departments look for is whether or not the “contractor” has their own liability insurance. If they do that is a good sign that they have their own business and only work for you on a contract basis.
Your insurance company will also require you to provide proof of insurance for any contractors that you hired over the course of the policy term.
If you can’t provide a copy of the document then they will usually rate you and increase your premiums at the time of your annual insurance audit.
Reckless and irresponsible behavior.
Behaving like this is reckless and irresponsible, and insurance companies don’t like policyholders to expose them to more risk. So they are going to charge you more in premiums because you have forced the insurance carrier to indirectly insure “uninsured contractors” who work for you.
It’s also a nightmare if the IRS decides that your contractor is actually an employee. In many cases, they will audit all of your records and direct you to pay both your portion of the employment taxes and the employee/contractor’s portion plus penalties and interest.
Since most of the tax agencies work with each other, the Federal Government will most likely notify the local and state tax agencies and you will have to go through it all over again with them.
Be a Professional Business Owner
Look, most of this is just common sense. You are in business. It’s time to act like an adult and be a professional business owner.
Otherwise, you will always be treated like a fly-by-night hobby instead of an actual business.
This is one of those issues that I hear from professional detailers constantly. The lack of respect. From customers, vendors, and basically anyone that you interact with during your day-to-day business.
If this is how you treat your employees, then why would you expect other people to treat you like a ‘real’ business?
People might look at you like you wash cars for a living. Nothing could be further from the truth, but they don’t know that.
I am not an accountant or a lawyer. So you will need to consult with your lawyer or accountant for more details on how these tax issues can directly affect your business. I’m simply offering you insight into the negative ramifications that can happen if you go down this path with your employees.
We included this for information purposes so that you can ask your legal and tax people how to best incorporate these matters as it benefits you and your business. The only advice I can offer from my own experience is to follow the rules and listen to the advice your legal and tax advisors offer you. It will save you a lot of money in the long run.