Home Posts tagged Contractor
Banking and Financial Services

Contractor or Employee?

By Sarah Rose Stack

 

Even prior to the pandemic, the ‘gig economy’ was growing at unprecedented rates. That growth has only been accelerated with more traditional companies relying on remote workers and hiring more contractor workers. Freelancing is big business, with nearly $1 trillion of income generated. However, although that total number is impressive, independent contractors earn 58% less than full-time employees (FTEs), and more than half don’t have any employer-provided benefits.

From a business perspective, there are advantages and disadvantages to how a company classifies its workers. With employees, you’ll have more control, but that comes with more compliance obligations. With contractors, you’ll have fewer compliance obligations, but you will also have less control.

“From a business perspective, there are advantages and disadvantages to how a company classifies its workers.”

Some tax advantages to hiring independent contractors include the ability to avoid several tax obligations that apply to employees. For example, a company generally isn’t required to withhold federal or state income taxes, pay the employer’s share of Social Security and Medicare (FICA) taxes, withhold the workers’ share of FICA taxes, or pay federal or state unemployment taxes.

In addition, companies that use contractors may avoid other obligations, such as the requirement to pay minimum wages and overtime under the federal Fair Labor Standards Act and similar state laws, furnish workers’-compensation insurance (in many states), make state disability-insurance contributions, or provide employee benefits.

Keep in mind that simply having a written agreement or labeling a worker as an independent contractor doesn’t make them so. The IRS and other government agencies look at all the facts and circumstances to determine whether workers are misclassified.

When someone is hired, they must be classified as either an employee or an independent contractor. Here’s how the IRS determines worker status.

 

Behavioral Control

If the company has a great deal of control over the behavior of the worker — for example, where they work, when they work, or how they perform their jobs — the worker should be classified as an employee. If the company is giving the worker evaluations, conducting extensive or ongoing training about procedures and methods, or demanding that the worker attend daily meetings or set hours, then the worker is more likely an employee. Independent contractors will customarily set their own hours, decide on how to implement a project, and dictate where they work.

 

Financial Control

If a company provides equipment for the worker (tools, software, computers, phone, etc.), often reimburses expenses, and/or pays on regular and ongoing basis, then the worker is more likely to be an employee. The IRS clarifies by considering the following:

• Significant investment in the equipment the worker uses in working for someone else;

• Unreimbursed expenses, which independent contractors are more likely to incur than employees;

• Opportunity for profit or loss, which is often an indicator of an independent contractor;

• Services available to the market, as independent contractors are generally free to seek out business opportunities; and

• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission, while independent contractors are most often paid for the job by a flat fee.

 

Relationship

Perception of the relationship is considered, but the interactions between workers and employees is what ultimately defines the relationship. Written contracts are considered; however, an employer cannot classify their workers as independent contractors when they, in fact, treat them like employees. If the company is providing employee benefits, insurance, paid time off, sick days, or pension plans, then the worker is most likely an employee.

Another area to consider is the permanency of the relationship. Employees are more likely to be hired indefinitely, and either party can terminate the relationship at any time, for any legal reason. Independent contractors’ rights are subject to a contract.

 

Penalties for Misclassifying Workers

The consequences for misclassifying employees as independent contractors can include IRS penalties and other non-tax implications. The IRS may assess back taxes against the company and demand that the company pay the employees’ share of unpaid payroll and income taxes, regardless of whether or not the independent contractors met those tax obligations. Companies can also expect to pay IRS penalties and interest. Further, workers can file a lawsuit against employers to demand back pay, overtime, and benefits.

 

Review Your Current Workers’ Status and Hiring Policies

The potential tax and non-tax savings do not outweigh the significant cost of misclassifying workers. It’s important to review your hiring policies, even if you are comfortable with your classification of current workers, to ensure that you are meeting all applicable standards for classification. Talk with your advisors if you believe you may have misclassified an employee or have questions about the standards.

 

Sarah Rose Stack is the Marketing manager for Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

Law

Remodeling Woes

Joshua L. Woods, Esq.

 

Many of us love watching home renovations on television. Whether the redos are taking place at a beach-house bungalow, a tiny apartment, or a Victorian mansion, it’s always entertaining to live vicariously through people remodeling a house or building their dream home.

But what happens when opportunity knocks in real life, and you have the chance to create a space of your own design? Perhaps you envision a beautiful, blue-tiled backsplash against white kitchen cabinets, heated bathroom floors, or a cozy living room with a gas fireplace. With a reliable and trustworthy contractor, all things are possible.

Unfortunately, not all contractors are reliable and trustworthy. Someone close to me recently experienced firsthand the horrors of hiring the wrong renovation company. My friends lived to tell the tale, but along the way, their family suffered through considerable delays, shoddy work resulting in added expenses and additional repairs, and the all-consuming worry of working with an uncommunicative contractor. Here is the story of a ‘craftsman’ remodeling company whose primary craft proved to be collecting payments for unperformed work.

It all began when my friends, first-time homebuyers, hired a local contracting company to perform a complete restoration and remodel of a charming 1930s colonial-style house. After interviewing five separate contractors, my friends decided to work with ‘Craftsmen’ (the company’s name has been changed to protect their anonymity). The contractor was extremely charismatic, proposed a comparable bid, and seemed to have just the right can-do attitude needed to complete the project. Craftsmen provided three references who, when contacted, sang the company’s praises. Craftsmen also had great online reviews. My friends decided to move forward and agreed to the terms of a proposal from Craftsmen, officially hiring the company for their project.

Joshua L. Woods

Joshua L. Woods

“They had to live through an enormous amount of stress, the upheaval of an unfinished living space, hideously long delays, and considerable additional expenses. You can learn from their mishaps.”

Craftsmen requested a down payment, and upon receiving the funds, the first step of the project — demolition — was scheduled. Pursuant to the payment schedule on the written proposal, the second payment would be due on demolition day, the third would be due when rough plumbing was installed, the fourth upon installation of rough electrical, the fifth upon installation of drywall, and the sixth and final payment would be due when the project was completed.

To their chagrin, my friends soon discovered the problem with this payment schedule: the majority of the fees would be paid prior to the rebuilding. That is, four hefty payments were required before the demolished spaces would be fully rebuilt.

At first, the contractor completed the demo work on schedule, but then they went silent. The house sat in disarray, unfinished, for months after the first payments were made. Nothing was accomplished properly. The plumbing was installed incorrectly, there was an old toilet left in the dining room for months, the trim was unfinished, the hardwood floors were ruined, exposed electrical wires dangled from the walls, and the list went on. My friends finally decided they could no longer tolerate the situation and made the decision to fire Craftsmen.

For anyone considering renovations, keep the following steps in mind, which can help protect you from a similar experience:

• Verify the contractor is in good standing. Ask for the contractor’s business-license number and research it on the state’s website to ensure there are no lawsuits against the company. You should also search the Better Business Bureau for complaints.

• Look into the contractor’s partners and vendors. Request a copy of the business license for all subcontractors who may work on your project.

• Contact references. Before hiring a contractor, always ask for multiple references and contact as many as you can. Listen closely to what they say. When speaking with references, you will certainly wish to inquire about the ‘big stuff,’ including satisfaction with the final project and pricing, but it may also be wise to inquire about smaller details including punctuality, cleanliness on the job site, responsiveness to calls and requests, etc. Looking back, my friend should perhaps have seen a red flag when Craftsmen provided only three references. A reputable company should be able to provide evidence of a great many satisfied customers.

• Have an attorney review the fine print. Another red flag should have been the lack of a formal contract at the outset and the lack of itemized billing during the project. Craftsmen provided only a written proposal, which is not sufficient for a project of this magnitude. When hiring a contractor, be sure to protect yourself by having a qualified attorney review all documents, proposals, and contracts before you sign. All contracts should include a clear payment schedule in which the final payment is typically 25% of the entire fee, provided only upon completion of the project and a satisfactory final walk-through with the contractor. Once hired, all communication should be in writing, and you should request regular written updates from the contractor, so there is a clear understanding of the status of work completed and work to be done.

• Document the process. As the saying goes, a picture is worth a thousand words, and that is certainly true where renovation projects are concerned. Be certain to take many photos of your project, including shots of the site before, during, and after the renovation is complete.

My friend and his family were ultimately able to pivot their renovation to another contractor, who repaired Craftsmen’s mistakes and finished the project. The family is now happily enjoying their beautiful, freshly remodeled home.

If my friends had only done more diligent research and consulted with an attorney before working with Craftsmen, they could have potentially avoided the entire awful experience. Instead, they had to live through an enormous amount of stress, the upheaval of an unfinished living space, hideously long delays, and considerable additional expenses. You can learn from their mishaps and use the steps above as important preventive measures. They may be your — and your house’s — saving grace. v

 

Attorney Joshua L. Woods is an associate with Bacon Wilson, P.C. and a member of the firm’s business, corporate, and commercial law team. He has extensive experience in matters of business law, including all aspects of corporate formation, franchising, joint ventures, leasing, and business and commercial litigation. He is licensed to practice in both Massachusetts and Connecticut; 413-781-0560; [email protected]

Accounting and Tax Planning

Employee or Contractor?

By Danielle Fitzpatrick

Taxpayers often ask about the difference between being an independent contractor and an employee. Although it may seem like they both perform similar work, there are some significant differences when it comes to their responsibilities and when filing annual income-tax returns.

Perhaps you are currently working for an employer and are considering becoming a contractor, or maybe you have just graduated college with a degree and are trying to decide which option is best for you. Whichever route you decide to take, it is important to know the differences so that you can plan accordingly.

Differences in Responsibilities

You are considered an employee when the business you work for has the right to direct and control the work you perform. You are given specific instructions on when and where to work, and are often provided training and the necessary equipment needed to perform specific duties. As an employee, you receive regular wages and may be eligible for benefits such as insurance, retirement, vacation, and sick pay.

You are considered a contractor when services are provided for a specific period of time. Rather than being paid a regular wage, you are paid a flat fee for contractual services. As an independent contractor, you are not eligible for benefits or training through the businesses you are performing services for. You are in charge of your own schedule and typically have several clients for which you are providing services.

Differences at Tax Time

One of the biggest differences between being an employee and a contractor is how your income is taxed on your income-tax return. Unfortunately, the difference is often not realized until an individual files their return and is faced with a significant tax burden.

As an employee, your employer pays 50% of your Medicare and Social Security (FICA) taxes. The other 50% is withdrawn from your regular paycheck along with federal and state (if applicable) tax withholdings. If any expenses are incurred and unreimbursed by your employer, the expenses are not deductible for the employee. On an annual basis, you receive a Form W-2, which shows your taxable income along with all taxes that you had withheld throughout the year.

“One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses.”

As a contractor, you are considered self-employed (a sole proprietor). You are now responsible for 100% of the FICA taxes, also known as self-employment taxes. No federal or state tax withholdings are withdrawn from the income you receive, and you may be required to make quarterly estimated tax payments. On an annual basis, you receive a Form 1099-MISC showing the gross income you received in excess of $600 for each business you performed services for. All of the income you receive as a contractor is reportable on Schedule C, which is filed with your individual income-tax return, or on a business tax return if you choose to become incorporated.

One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses. Expenses that may help offset your income include, but are not limited to, vehicle expenses, travel expenses, supplies, fees paid for continuing education, and the renewal of professional licenses.

Some Examples

Say you are an employee making $25 an hour and working 40 hours a week. For this example, note that nothing is being withheld for benefits. Your paycheck would look like the following:

Weekly Pay ($25 x 40 hrs.) $1,000
Less:
Federal Taxes Withheld       $200
State Taxes Withheld             $50
FICA Taxes Withheld             $77
Total Weekly Pay              $673

Now, say you are a contractor and charge $25 an hour to provide services to three businesses totaling 40 hours for the week. You receive a total of $1,000 for the week. In addition, you purchased $30 in office supplies and drove 250 miles for the week. Your net income for the week would be:

Gross Income             $1,000
Less:
Office Supplies                $30
Mileage Expense           $145
Taxable Net Income    $825

Now you’re thinking, why am I not a contractor? I bring home over $300 more a week! Yes, you bring home more for the week, but you cannot forget that taxes are not being withheld from your income. You will be responsible for paying these taxes on a quarterly basis and/or when you file your tax return.

As an employee, you report $1,000 as taxable wages on your income-tax return, from which federal and state taxes have already been withheld and will hopefully cover your tax liability. As a contractor, you have taxable net income of $825, but you are now responsible for self-employment tax, in addition to regular income tax that you have not yet paid.

Conclusion

So, should you become an independent contractor or an employee? There is no right or wrong answer; each individual needs to make their own decision and determine what will work best for them and their situation. However, whichever route you decide to take, be sure to consult your tax professional for advice to eliminate any potential surprises and ensure that you are prepared when it comes to filing your annual income-tax returns.

Danielle Fitzpatrick, CPA, is a tax manager at Melanson Heath. She is part of the Commercial Services department and is based out of the Greenfield office. Her areas of expertise include individual income taxes and planning, as well as nonprofit taxes. She also works with many businesses, helping with corporate and partnership taxes and planning.

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