Oct 01

We use employees almost exclusively, for a number of reasons.

Worker Comp insurance is important as your homeowner’s policy does not cover people working on your property.

More importantly the tax implications if a contractor is reclassified as an employee.

Why is the tax issue more important than the workers comp? You can and should have a worker comp policy even if you feel most of your worker bees are contractors.  So go out, get it and sleep well.

Now onto the consequences of a contractor being reclassified as an employee for tax purposes.  A number of years ago we had a lady who cleaned carpet for us.  She had her own machine.  She used her own chemicals.  She charged a fixed rate based on the number of rooms.  She had a number of other clients at the time we started using her. We found her through an ad she ran in the Shopper.  And she set her own schedule.

Well she also had a full time job and was laid off after she began doing our carpets.  She did not earn enough at the full time job to get the top unemployment benefit so she decides to include the earners from carpet cleaning to up the benefit.  The state ruled that she was an employee based on the following: She never filed taxes for the carpet cleaning income.  She did not have a FEIN.  At the time she was laid off we were her only remaining client.  And ONE time we told her a job absolutely positively had to be done on a certain date.  Well had I hired Adelman to clean the carpets I would have told them the same thing on that job.

Over a six month time period we paid her a bit over $400 for doing a dozen carpets.  The penalties and taxes we had to pay due to the reclassification were a bit over…$400.

You would have thought the government would have shown us some consideration as we had fifty some payroll  employees that year, so clearly we were not trying to skirt the law. But they use a 21 step test.  Fail an important one, or a few lesser ones and the person doing the work is an employee.

But $400 was a cheap lesson I guess. Earlier this year I spoke to an AASEW member and part time landlord who is fighting $20,000 in penalties.  Just last week I spoke to yet another part time landlord who is facing $60,000 in penalties due to reclassification of his “contractors” to employees. If you get this wrong and don’t file the proper employment tax forms the government can look back for something like six years.

And calling your workers contractors is became much more risky with President Obama’s signing of a new 1099 provision into law this week.

Today, unless I can find you in the Yellow Pages and you want to work for us it will be as an employee.

2 Responses to “Your handyman – cheap contractor or $60,000 mistake?”

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