Why you should listen to your accountant (Employee classification)

So, you have an accountant and you have a business, right? The business requires an accountant or multiple accountants and they talk about ROI or whether or not you should be counting your people as employees or independent contractors and a whole host of things that you don’t even care about. Or you don’t know that you should care about them because your accountant hasn’t explained sufficiently WHY these things should be important to you.

Let’s take the employee vs independent contractor debate. You can check it out here. The IRS has very specific rules about who is an employee and who isn’t.

The first rule is, “Who’s rules?” At the end of the day, as a small business person I know, you just want the thing done. If you just throw some money at a person, and say, “Hey, do this thing for me for this price,” and they say, “okay,” go away and bring you back the finished product, that’s more likely to be an independent contractor. If you start laying down rules as to how they make the thing, it slides into employee territory. For example, I had a young lady come in for tax time, and she’d been given a 1099, independent contractor payment. She showed up to work at her cleaning job, at the time given by her employer, used supplies provided by employer and worked the hours requested by the employer. She was, in fact, an employee, by the Behavioral Control Rule the IRS sets down.

The second rule is, “Who pays?” If the employer pays hourly, the person in question is more likely an employee. If they pay by contract, that is more likely independent contractor. Sometimes this will come down to something as simple as, ‘Who owns the tools that did the job?’ If Behavioral control is murky, Financial Control may be able to straighten this out.

The third rule is “How close are you working?” Relationship may be your ultimate determining factor. Independent contractors don’t get health insurance, 401(k)s, and are generally hired to do a specific thing or series of things. The way that you work with your employees tells you if they are true employees.

Why is this something that your accountant will be landing on you with both feet over? Well, because misclassified employees can be super expensive to you. That lady that I talked about? We wrote an appeal to the IRS that she didn’t qualify as an independent contractor because she would have been out thousands of dollars in self employment taxes that she wasn’t informed by the employer that she would be owing. (it’s possible that the IRS may resolve this in the employer’s favor, but with the COVID, it’s been taking time) She still may end up owing that money, but she will have some time to gather that as we appeal the employers misclassification of her employment status. And, with a small, newer cleaning company, that may spell the end of that company, I don’t know, I didn’t represent that company, I represented the employee to the IRS. But if I did have that company as a client, I would be on the horn with the owner, talking about who is getting those clients, who is serving those clients, who is buying product, who is setting the times for the cleaning to happen, and if the owner’s answer to most of that is, “me,” then we would be looking at what needed to happen to make the arrangement an employee-employer relationship instead of a business owner-independent contractor, because that is the more honest and the one that’s less likely to come bite you in the rear at tax time.

Trust me, you don’t want the IRS knocking on your door with a stack of SS-8s saying that they want you to pay a whole mess of back employer taxes.