Detail Shop 1099 Contractor
As I ask other detailers often, are you a small shop owner who pays his 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 are outright paying your employees as a willing participant in allowing both them and you to illegally avoid paying taxes. Obviously you have your reasons for doing this, but if you get caught you’ve clearly already figured out what will happen. The second 1099 method is simply another method to illegally pay “employees”.
Detail Shop 1099 Contractor
Many businesses in the detailing and tinting industry pay their workers by check and issue a 1099 at the end of the year calling them “independent contractors”. Hence the detail shop 1099 contractor classification. Paying anybody under the table is illegal and not a good idea at all. Considering these workers to be 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 on the detail shop 1099 contractor side, you are notifying the IRS that you are paying these workers by this method. The IRS fully knows that detail shops do this so you are just alerting them to look at you more closely. I have included the IRS criteria below for proper classification of a detail shop 1099 contractor or employee.
A Simple Rule for Properly Classifying Detail Shop 1099 Contractors
A simple rule for properly classifying detail shop 1099 contractors is that you control the results, but everything else is up to the contractor. So basically you get the car at your shop and you hire the contractor to do their work as they see fit with their own equipment, their own insurance, on their own schedule.
The IRS will reclassify your detail shop 1099 contractors to employees by simply asking a few somewhat vague questions:
- Do you tell these workers how to do their jobs?
- When to do their jobs?
- Provide equipment for them to do their jobs?
- So essentially do your tell your workers how they should be detailing cars?
- Do you train them?
- Do you have set hours that they need to show and then leave from work?
- Do you tell them how long they have to get cars done?
- Do they use any of your equipment to detail or tint cars?
Did you answer yes to ANY of these questions? If so, then your “detail shop 1099 contractors” are actual W-2 Employees and you are flagrantly violating Federal and State employment law.
I Didn’t Know is NOT a Defense
I always find it humorous when you talk to detail shop owners using this method and there response is that they plan on telling the IRS that they didn’t realize the difference but they promise not to let it happen again. 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.
The IRS Might Accept Your Apology But Still Penalize You
So while you can apologize all you want, the IRS couldn’t care less about you. They might accept your apology but still penalize. How? By telling 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 also charge penalties and interest for all the years that you did it. The really 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’re still stuck. IRS taxes can’t be eliminated in bankruptcy. So they will still come after you for everything. The IRS always gets it’s money.
Do The Right Thing
Here’s an idea, do the right thing and pay your employees properly with the correct classification as W2 employees. You don’t want the stress of looking over your shoulder wondering when you might get caught. If you can’t afford to pay the taxes that are due, then your costs are too high, pricing model is wrong or something is out of wack. You should be able to make money and run your business legally without having to cut corners like this. Otherwise it will end up being a huge problem for you down the road.
Continuing below is the criteria that the Federal Government uses to determine whether or not they are “employees” or “independent contractors”. 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 such proof then they will rate you and increase your premiums at the time of your annual insurance audit since you have exposed your insurance carrier to insuring “uninsured contractors” who work for you.
As I mentioned above, it’s also a nightmare if the government decides that the “contractor” is actually an “employee” resulting in you having to pay both your portion of the employment taxes and the “employee/contractor’s” portion plus penalties and interest. The Federal Government will also notify the local and state agencies and you will have to go through it all over again with them.
It’s Time to Put Your Big Boy Pants On
Look, most of this is just common sense. You are in business. It’s time to put your big boy pants on and be a professional business owner. Otherwise you will always be treated like a fly-by-night hobby instead of an actual business.
I am not an accountant or an attorney, so you will have to consult with these experts to get details on how any of this applies to you and your business. We just 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.
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