Auto Detailing Guide

Independent Contractor or Employee?

As I asked you in another section of the site, are you a small shop owner who pays his workers under the table? Or do you do like many other shops in the detailing and tinting industry and pay pay them by check and issue a 1099 at the end of the year calling them "independent contractors"? 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. The criteria that the Federal Government uses to determine whether or not they are "employees" or "independent contractors" is as follows:

"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.

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.

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.

I am not an insurance agent, accountant or an attorney, so you will have to consult with all three of 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 tax and insurance 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 tax and insurance advisors offer you. It will save you a lot of money in the long run.