PDA

View Full Version : question for discussion about 1099's


lawnwizards
03-28-2006, 12:23 PM
here recently people have talked about employing people and sending 1099's out instead of witholding taxes.. my question is, (for sake of argument) what if you were to rent out your equipment to the people you send the 1099's to. for example... you normally pay your trimming guy $10 per hour.. you up it to $11 and charge him $1 per hour rent... as for setting the working timetable, maybe someone else has any idea about this.... not trying to break the law, just starting a 1099 discussion... all input is appreciated.:waving:

lawnwizards
03-28-2006, 02:12 PM
come on guys and gals, just because you comment doesn't mean you're breaking the law... this is just for discussion...

HighGrass
03-28-2006, 03:12 PM
here recently people have talked about employing people and sending 1099's out instead of witholding taxes.. my question is, (for sake of argument) what if you were to rent out your equipment to the people you send the 1099's to. for example... you normally pay your trimming guy $10 per hour.. you up it to $11 and charge him $1 per hour rent... as for setting the working timetable, maybe someone else has any idea about this.... not trying to break the law, just starting a 1099 discussion... all input is appreciated.:waving:

I think at some point and audit would bite you.

John from OH
03-28-2006, 03:23 PM
Is there really anything to discuss? I think the IRS guidelines don't leave much wiggle room on this issue. Play by their rules, sleep at night. Payroll expenses are a part of business. Add them in your rates, paythe government when the taxes are due. Its not as hard as it sounds and not as expensive you think since you are recovering the money through pricing.

If you think that you'll take a $10 per hour employee, give them an extra buck, and then take the extra buck back in rental, will make them happy, I think your kidding yourself. They then would get to pay liability insurance, self employment taxes, book keeping and other misc. expenses out their $10.
Does this sound like a good deal to you?

lawnwizards
03-28-2006, 03:30 PM
Is there really anything to discuss? I think the IRS guidelines don't leave much wiggle room on this issue. Play by their rules, sleep at night. Payroll expenses are a part of business. Add them in your rates, paythe government when the taxes are due. Its not as hard as it sounds and not as expensive you think since you are recovering the money through pricing.

If you think that you'll take a $10 per hour employee, give them an extra buck, and then take the extra buck back in rental, will make them happy, I think your kidding yourself. They then would get to pay liability insurance, self employment taxes, book keeping and other misc. expenses out their $10.
Does this sound like a good deal to you?
calm down bro... $10 dollars is just a number i threw out... plug in your own number and see how it works... remember, this is just a hypothetical situation. it doesn't apply to anyone....

gce_ent
03-28-2006, 03:44 PM
Nothing illegal when playing by the rules.

The laws for 1099 are the following:

- They cannot be in your equipment
- You cannot give give them hours to work
- You cannot tell them where to work
- They have to sign the 1099 form

So as you can see there are many ways in our business to have workers be 1099. I am not going to spell it out for you here because too many people will wine and b!tch because they refuse to play within the boundries setup by our govenment. That is their loss.

I do it for my other businesses and am completely in line with the law so if the IRS wants to sit out in the garage of my CPA in the 100 degree heat and review my info so beit.

John from OH
03-28-2006, 03:48 PM
Remember, you can't hear voice tone online. I'm not upset or hyper. I am to the point, that's my personality. If you were sitting accross from me, the tone would conversational, the wording pretty much the same. The answer may not be what you want to hear, but I stand by my statement.

I realize this is a hypothetical question, but you have to remember, the tax people set the rules, and the rules just don't allow much leeway. Without much leeway, there is little to discuss. I just don't want to see someone new to the industry read these posts and decide to set up his employees as subs and then 1099 them. The penalties are not worth it.

In your words "employing people and sending 1099's out instead of witholding taxes.. ".

My unput into the discussion is that this is not the area to try to beat the tax man. It just isn't legal, hence is there really anything to discuss?

Legitmate subcontractors are a whole different subject. They will set the pricing to recoup all of their costs, you pay the invoice when they hand it to you.

grandview (2006)
03-28-2006, 05:33 PM
Try this and work backwards. How much would the find be plus back tax you owe divide that by the hrs worked by your guys.Would it be better just to pay them as employees? Don't forget piss one off and they call the tax man on you.

John from OH
03-28-2006, 06:56 PM
The laws for 1099 are the following:

- They cannot be in your equipment
- You cannot give give them hours to work
- You cannot tell them where to work
- They have to sign the 1099 form

There are about 20 requirements to meet, a search of old posts should bring up the list as I have seen it posted on here.

Just to clarify - #4 is actually the W-9 Request for Taxpayer Identification Number and Certification. This is signed up front.

The 1099 is issued by the payer to the payee by the end of January. A copy is also sent to the IRS for matching.

gce_ent
03-28-2006, 07:55 PM
Just to clarify - #4 is actually the W-9 Request for Taxpayer Identification Number and Certification. This is signed up front.

Actually the document I was refering to is the TWCC85 Form. I attached it for your reference.

Mr. Vern
03-28-2006, 08:14 PM
Ok Guys here is what I have discovered. It is absolutely possible to work an arrangement with your current employees to become subcontractors. There are certain rules that apply; such as they have to control how the job is performed and the scheduling. There are several other requirements in order to be legit, but you would be a fool to get them from this or any other site like it. If you want to do this, start by going to the IRS site and read their rules. Then come here and discuss how others have interpreted and applied those rules. After that get with your accountant and/or an IRS rep if you need to. Once you have done the homework, run the numbers and if it works for you, do it. Don't forget to get a noncompete agreement in order to keep them from cutting you out of the loop. Oh, and to answer the question of why an employee would be interested in this approach is that they get some serious tax relief if they do it properly.

gce_ent
03-28-2006, 09:14 PM
Ok Guys here is what I have discovered. It is absolutely possible to work an arrangement with your current employees to become subcontractors. There are certain rules that apply; such as they have to control how the job is performed and the scheduling. There are several other requirements in order to be legit, but you would be a fool to get them from this or any other site like it. If you want to do this, start by going to the IRS site and read their rules. Then come here and discuss how others have interpreted and applied those rules. After that get with your accountant and/or an IRS rep if you need to. Once you have done the homework, run the numbers and if it works for you, do it. Don't forget to get a noncompete agreement in order to keep them from cutting you out of the loop. Oh, and to answer the question of why an employee would be interested in this approach is that they get some serious tax relief if they do it properly.

AMEN! Educate yourself and then do what makes sense.

Mower For Less
03-28-2006, 10:56 PM
I think your deal breaker would be the rule that states that a sub-contractor is not obligated to work for just you and needs to be available for work through other contractors. I just dont see how you could "fix" this little aspect.

That being said, if you could legally do it, there would be some nice tax benefits for the payee if he did not make enough to itemize deductions and only take a standard deduction. The business expense writeoffs of cell phone, car expense, advertising expense, office expense, etc... I'm sure could be sufficient enough to make his individual tax liability less than if he were a true employee on a W2. The ability to itemize business expenses while still taking a standard deduction pretty much insure that there tax liability will be virtually nothing all the way up to about $12,000.

dtelawncare
03-29-2006, 12:21 AM
I favor the legal way. Saying that, if I pay workers under the table, I then can not claim the income because I would then have to show full profit without the loss I payed workers. OK lets say that goes under the radar for a year or two. I'm only making about $25,000 per year. I am paying for a $150,000 house, two $30,000 vehicles, private school (2 kids) and have a 6 month old. I claim $6,000 in interest on my house, $2,500 in day care, ect,ect,ect.. At some point, the IRS will see more going out than in. Al Capone was put in prison for tax evasion, not all the other crimes they could not pin on him. Sorry to be so long.

emil35
03-29-2006, 01:00 AM
I believe it can be done. I have educated myself on the issue and know it can be for I have considered using this method in the coming years. You can show the expense, the subs are a business cost - just like the shop you take your mowers for service. You can require the sub to have insurance and other such things - I'm required to do so by my contracts for work, same thing when you think about it. The choice to work just for you is the choice of the sub...I have a customer that gives me alot of work, nearly 75% of my income. That's my choice to stick with them and I know if things change, ways to get more work. How many of your employees work two jobs to make ends meet...I know over half of mine did, that's why I didn't mind giving them bonuses from time to time...its money for a good cause. If you have a good accountant, it will be fine in the eyes of the feds...that what you pay them for and that's why you use them. I know I'm young, but I do know what I'm talking about becasue I've educated myself on the issue. And from the first post, I've thought about renting out my equipment as well.

JB1
03-29-2006, 01:06 AM
By jove I think you got it figured, go for it.

lawnman_scott
03-29-2006, 01:49 AM
I believe it can be done. I have educated myself on the issue and know it can be for I have considered using this method in the coming years. You can show the expense, the subs are a business cost - just like the shop you take your mowers for service. You can require the sub to have insurance and other such things - I'm required to do so by my contracts for work, same thing when you think about it. The choice to work just for you is the choice of the sub...I have a customer that gives me alot of work, nearly 75% of my income. That's my choice to stick with them and I know if things change, ways to get more work. How many of your employees work two jobs to make ends meet...I know over half of mine did, that's why I didn't mind giving them bonuses from time to time...its money for a good cause. If you have a good accountant, it will be fine in the eyes of the feds...that what you pay them for and that's why you use them. I know I'm young, but I do know what I'm talking about becasue I've educated myself on the issue. And from the first post, I've thought about renting out my equipment as well.So if your "subcontractor" wants to go and weedeat his moms yard your fine with that? Even though shes a alcoholic and insists he have a few beers while he is there? Oh and then someone wants him to do some work with "his rented equipment", thats ok too? OOOps, then he breaks a window....... does your insurance cover subs? Its alot of hassle to save a small amount of money.

John from OH
03-29-2006, 10:46 AM
Here is the list and one of the best posts I have seen on this subject as posted by Leadarrows on another thread.

Employees and Independent Contractors



Individuals frequently perform services for companies, non-profit organizations, individuals and others under a variety of different legal relationships. Whether the individual providing the services is classified
as an employee is critical for a number of different purposes.

Under federal, state and local tax laws, "employers" (which may include for profit and not for profit companies, individuals, schools, government agencies and other entities) are required to deduct and
withhold from their "employees" a percentage of wages to be paid to the taxing authorities to insure the payment of income taxes. Employers who fail to properly deduct and withhold the appropriate amounts
and pay them over to the appropriate taxing authorities can be subject to a variety of penalties and interest charges for unpaid amounts. Employers are also obligated to withhold and deduct FICA (i.e., social
security), unemployment and other taxes and charges. The Internal Revenue Service can, in certain cases, impose personal liability upon the "responsible party" at the employer that has failed to properly
pay these taxes. Classification of an individual as an employee will also affect whether the hiring party is subject to federal and local wage and hour laws, employment discrimination and other laws.


Proper classification of an individual as an "employee" or "independent contractor" is critical. While the ultimate classification is a matter of common law principles as to whether the worker is subject to the
control and direction of another only as to the result of his work (an independent contractor) and not as to the means (an employee), the Internal Revenue Service has established twenty factors it reviews to
help determine the proper classification. The twenty factors are:



1. Instructions to worker - A worker that is subject to instructions about when, where, and how to work is usually an employee.

2. Training - An employee is more likely to be subject to training than an independent contractor.

3. Integration into business operations - The greater the integration of a worker's services into the business, and thus the greater the business' control, tends to reflect an employment relationship.

4. Requirement that services be personally performed - The greater the flexibility given the worker to designate who may perform services favors an independent contractor classification.


5. Hiring, supervising, and paying for a worker's assistants - If the business provides assistants to the worker, as opposed to the worker providing his or her own assistants, this may indicate that
the worker is an employee.

6. Continuity of the relationship - Continuing, "on call" or similar long-term relationships, even if part-time, support classification as an employee.

7. Setting the hours of work - An independent contractor usually sets his own work hours.


8. Requirement of full-time work - Independent contractors, unlike employees, do not normally work full-time for one business and are free to work when and for whom they choose.

9. Working on employer premises - If the business requires work to be performed at its offices, this indicates control over the worker (if the work could be done elsewhere).

10. Setting the order or sequence of work - Independent contractors generally enjoy greater freedom to follow their own pattern of work routines and schedules.


11. Requiring oral or written reports - Regularly required oral or written reports usually reflect an employee relationship.

12. Paying worker by hour, week, or month - Employees are normally paid hourly, weekly, or monthly, while independent contractors are usually paid by the job or on a straight commission basis.

13. Payment of worker's business and/or traveling expenses - This factor reflects a business' effort to control its expenses through an employee.


14. Furnishing worker's tools and materials - Employees are normally provided necessary work tools and materials, independent contractors tend to furnish their own.

15. Significant investment by worker - Employees are normally provided the requisite facilities by their employer, while independent contractors usually invest in and maintain their own work facilities.

16. Realization of profit or loss by worker - A worker who can realize a profit or suffer a loss as a result of his services is generally an independent contractor. Of course, some employees may also
realize a profit or suffer a loss, as a result of profit sharing plans or investments in the company. In that case, the IRS will examine whether the worker's profit or loss opportunities are different from an
employee's.


17. Working for more than one business at a time - Employees usually work for only one company, while independent contractors frequently work for more than one business.

18. Firm's right to discharge worker - An employer exercises control over its employee through the threat of dismissal, while independent contractors normally cannot be dismissed so long as they meet
their contractual obligations.

19. Worker's right to terminate relationship- Employees are usually entitled to quit at their leisure, while independent contractors generally must fulfill contractual obligations.


20. Availability of worker's services to the general public - If the worker usually makes himself or herself available to the public to perform services, he or she is more likely an independent
contractor.


The penalties for mis-classification under tax and other laws are severe and may, in some cases, create personal liability for the individual that has established the employment relationship or was a
responsible party for deducting and withholding payroll taxes. Use caution in making the employee/independent contractor classification, and consult an attorney for advice.

Other factors should be considered to determine whether an individual should be retrained as an employee or independent contractor. For example, it is much easier to dictate to and control the work of an
employee. The employee is usually at the employer's offices throughout the work period and work can be more easily monitored. Also, the employee is more likely to develop some loyalty to the employer
and is less likely to leave for another position. However, independent contractors may be freely terminated if the work is not satisfactory. With true independent contractors, there is no cost for employment
taxes and fringe benefits.


If you are considering the hiring of one or more individuals to perform services for your business or organization, you should consider the benefits and features involved in making that individual an employee
or, alternatively, an independent contractor. Make sure that if you choose to make someone an independent contractor, that he or she is truly not an employee under the law. Small Business Attorney
provides an Independent Contractor Agreement form for arranging for work from an independent contractor or consultant.


Backup Withholding
Even though a worker is a true independent contractor; the business does not escape all tax law obligations. When a contractor is retained, have him or her complete IRS Form W-9. In this form, the
contractor certifies his or her taxpayer ID number (i.e., Social Security Number). With proper certification from the contractor, the employer's only obligation is to file a form 1099 with the IRS (with a copy to the
contractor) showing the amount paid. Without this certification, the employer must withhold an amount as a backup for the IRS, much as if the worker were an employee. See IRS Publications 937, Employment
Taxes; 505, Tax Withholding and Estimated Tax; and 550, Investment Income and Expenses, for more information.



For related information see:

Employment At Will

Fair Labor Standards Act

COBRA - Group Medical Benefits

Family and Medical Leave Act of 1993

Americans with Disabilities Act

Plant Closing Law

Workers' Compensation

In the original post by lawnwizzards, I think #3, 4, 12, 14, and 15 are going to be the sticky ones.

As I read the posts, I think we are talking about 2 different things. Lawnwizzard as specifically about employing someone and renting them your equipment to do the work, paying them by the hour and then giving them a 1099.

On the other hand, you can enter into a subcontractor agreement providing you meet the above criteria.

gce - The form you posted is a Texas Workers Compensation form. The W-9 is an IRS document that needs to be completed. This is at the Federal level and it will contain all the information needed to file a 1099 in January.

If anyone has any doubts, the IRS does have a specific form you can fill out and they will determine the worker's status. With the workers status in writing from the IRS, you will be fine.

gce_ent
03-29-2006, 11:26 AM
gce - The form you posted is a Texas Workers Compensation form. The W-9 is an IRS document that needs to be completed. This is at the Federal level and it will contain all the information needed to file a 1099 in January.

Yes I am quite aware of the W-9 as I have filled out many of them. I was simply letting you know that I was referring to another form which I could not remeber at the time. It is different for every state but is necessary when subcontracting.

However, I think the amount of info now in this post is enough to get anyone on the right path. I was simply stating that if you follow their rules and can make it work in your operation, it is not illegal.

emil35
03-31-2006, 04:14 AM
Thank you gce_ent - My thoughts exactly