Sub or Employee? The Legal Puzzle
From contributor C:
I wouldn't take any chances with this one. Hiring a temp is a good option, but if you want to hire this guy, contact your state dept of employment security and they will give you a handbook outlining your obligations on all these issues. You also need to contact the IRS for the same reasons. They tend to show particular interest in companies hiring private contractors on a regular basis. You need to have all the facts straight from the horse’s mouth to make an informed decision.
From contributor R:
Be careful. There are ways to do what you want to do but look into your state laws. A few years ago I used to carry my own workman’s comp and liability insurance and sub out to contractors. It can be done legally but there are a lot of ways to get snagged up and end up with a fine for the employer. Check with an accountant as well. Where I'm from it's not uncommon for an owner to carry insurance on himself.
From contributor J:
If he is going to be working in your shop and presumably under your supervision and guidance he is not an independent contractor, according the local, state, and the fed government he is an employee. If he has verifiable workers comp insurance, that's fine. It doesn't matter who pays for it, but you do need it. You will have to withhold FICA taxes and match them, Fed and state income tax withholding, and state and Fed unemployment tax.
From contributor D:
I have seen several shops get caught and close since they do not fit the IRS subcontractor definitions. The former owners will spend the rest of their lives paying the IRS. The shops that call them employees never have a problem. In fact, a couple of savvy nearby shops that know their numbers can tell when a shop full of "subs" is bidding the same work due to the difference in selling prices.
The IRS doesn't catch them until someone complains or calls it to their attention. Just because the IRS hasn't come knocking doesn't mean it is an allowed definition, your liability just increases - exponentially with penalty and interest. The obvious tell of course, is that every business in the US - from GM to H R Block - would change to subcontractors if the 1099 route was anyway near legit.
From contributor E:
There is a lot of sound advice above about the fact that one is playing with fire if one tries to treat an employee as an independent contractor. It's not just the tax, penalties and interest which would wind up being due if the treatment is found to be improper, it's the fact that you as the owner of your sole proprietorship or officer of your corporation are personally liable for the tax, penalties and interest.
The IRS summarizes their rules thusly:
Behavioral Control covers facts that show whether the business has a right to direct and control how the work is done through instructions, training, or other means.
Financial Control covers facts that show whether the business has a right to control the financial and business aspects of the worker's job. This includes:
Type of Relationship includes:
Consult a competent tax professional before proceeding. Mistakes in this area can be very expensive.
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