Will this fly with the IRS?

Discussion in 'Lawn Mowing' started by DFW Area Landscaper, Sep 10, 2004.

  1. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Posts: 2,116

    As some of you may know, I suffered a back injury last week and I am unable to work.

    I've tried to find a replacement for myself, but everyone who works only works a day and then quits.

    I'm figuring out my pay scale is too low. I need to pay enough such that my employees are taking home $9.50/hr for line trimmer and $11/hr for crew leader. The problem is, when I withold social security taxes, pay overtime, pay workmans comp insurance and pay unemployment taxes, this will cost me nearly $30/hr for a two man crew.

    If I could just hold my labor costs down to 50% of gross I think I'd be ok.

    I talked to my employee and he understand my predicament. He likes the new plan we dreamed up this morning, but my gut feeling tells me it won't fly. I will talk to my accountant and see what she thinks:

    My employee will become a subcontractor. He will take 50% of the gross revenues for the day. If we have a cost of goods sold, that will be deducted from the days gross. If he needs to get more help, it's his problem. He will be driving my truck and using my equipment and wearing my uniforms. He will do whatever work I have scheduled for him that day but in any order that he chooses. He will have no set start or stop time. He will determine that on his own. If wants to start 7:00, ok. If wants to start at 9:00, that's ok too. Just as long as he gets the job done on the day it's supposed to be done.

    Anyone think there is a chance in he!! this would pass during a TWC or IRS audit?

    Thanks for any input.

    Later,
    DFW Area Landscaper
     
  2. Geoffrey

    Geoffrey LawnSite Member
    Posts: 107

    DFW,
    50% of the gross that day? You don't have an employee or subcontractor you have a PARTNER! Will this arrangement change once your back is better?


    Geoff
     
  3. naturescaretaker

    naturescaretaker LawnSite Senior Member
    Posts: 851

    Only if he is providing the truck and all of the gas for the equipment. Went through an IRS audit a few years back and learned that one.
     
  4. rjjmurph

    rjjmurph LawnSite Member
    Posts: 6

    not a chance! The IRS is pretty clear on the definition of a subcontractor vs. an employee, especially in our business, and you my friend have described an employee. Once you start providing equipment and dictating when jobs need to be done and the like, you are an employer. If it worked liked you had set it up, we'd all be sub contractors. I worked a few angles myself and my accountant wouldn't buy it based on the IRS definition.

    If you come up with something, I'd like to know because, as you say, comp and disability and unemployment kill us.
     
  5. eshreve1234

    eshreve1234 LawnSite Member
    Posts: 184

    Who Are Employees?

    A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

    Above is pasted from IRS.gov

    If you wanted to skirt the taxes, have the employee set up his own company, and subcontract them to perform your work. Then you are paying abc corp (who is then liable for all taxes, insurances etc), vs. your employee.

    My advice to play by the rules and continue paying your employee right now, so you have something left for next year. Maybe pick up some short term disability for your self also.
     
  6. out4now

    out4now LawnSite Bronze Member
    from AZ
    Posts: 1,796

    What if you used a Labor Ready or Labor Force temp? Would these guys be out on their own, or do you have an empolyee who can watch them to make sure they don't rob you blind? At 50% of each day you might as well just be selling jobs for someone else and taking a cut of the sale. You're in a sticky position it sounds like. I'm interested in what other ideas people may have as well.
     
  7. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Posts: 2,116

    Yupper. Spoke with the accountant just now. She believes that if my employee were using his equipment to get the work done, I'd be ok. She did indicate that the chances of getting caught with the misclassification are very, very low. But I just don't want to take a chance on being bankrupted down the road by an IRS audit.

    I think that if he were driving his own truck and pulling my trailer and equipment, I might have a chance during an audit. But with him driving my truck and using all of my equipment, I think that one is the killer.

    My problem is that retail prices are very low in my area. I know some have seen my other threads where I've been whining about the Cheep, Cheep door hangers at $19.99/cut. I've figured out that if I bid them high (which I define as being over $1.00/minute for a two man crew while on the property), I either don't win the business to start with, or if they do sign up, they cancel within a short time. But if I bid them low, they seem to stay on the schedule a whole lot longer. You wouldn't think $15/mo difference would matter that much to a home owner, but I guess it does. About the most I can gross with a two man crew, after spending time fueling, buying ice, changing oil, sharpening blades and maintaining my own landscape at my home is roughly $40 to $45 per hour. With a two man crew costing me just under $30/hr, it isn't worth the effort. Even if I make the capital investment to advertise and multiply the numbers for three crews, after all the other costs, it still wouldn't be worth it.

    I think me gonna have to shut 'er down.

    There may be a whole lot more money with commercial maintenance but the opportunity cost is another year of my life just to find out. I think I have a job pretty much lined up with VZ close to what I was making when I got laid off in '02. It's been a wild two years. I've learned a lot. Maybe I've gotten the self employment bug worked out of my system. All in all, I've worked my butt off and made about $25 grand in 21 months. Spent about $12K on equipment that I may have to park at the city dump. So I guess I cleared $13 grand for 21 months of hard labor.

    Good luck to you guys who are making money at this. You're smarter than I am. I guess I'm just too dumb to make it work.

    I'd also like to thank LawnSite for all the free education. LawnSite has definitely been a good resource.

    Later,
    DFW Area Landscaper
     
  8. bobbygedd

    bobbygedd LawnSite Fanatic
    from NJ
    Posts: 10,178

    hold it. what if you charge him a rental fee for using your truck and equipment?
     
  9. DUSTYCEDAR

    DUSTYCEDAR LawnSite Fanatic
    from PA
    Posts: 5,137

    how long till u r back on your feet
     
  10. Oldtimer

    Oldtimer LawnSite Bronze Member
    Posts: 1,458

    Accounting Concepts – Employee or Contractor
    an introduction to the principles of accounting
    A small business owner is required to wear many hats. In most situations, the small business is really a one-person operation. There comes a time when the volume of work grows so much that the owner must bring in extra help. However, hiring employees increases the amount of administrative work required and instantaneously doubles the paperwork required to run your business. To give you an idea of the requirements that you will have to comply with as an employer the following is an incomplete list of things that need to be accounted for when becoming an employer:

    - Payroll records.
    - Withhold Federal taxes.
    - Withhold local and state taxes.
    - File quarterly payroll reports.
    - Pay your portion of federal taxes.
    - Pay worker’s compensation insurance.
    - Individual reports of earnings must be prepared for each employee.


    As you can see the prospect of becoming an employer is something that a one-person business does not look forward to. Nevertheless, there is a way for some businesses to get the extra help needed without running afoul of regulations. Essentially a business can get the extra help by hiring “outside contractors”.

    The practice of hiring outside contractors has been sometimes abused by unscrupulous operators. There are a lot of businesses that must have employees in order to operate, but the owners decide to treat those employees as outside contractors in order to minimize the amount of paperwork and the amount of pay due to the employees.

    Usually, there are two tests that the IRS looks for when making the determination of whether a person is am employee of a business.

    Test one: Does the business control the way how things are done by the individual? If the business has control then the individual is an employee.

    Test two: Does the individual perform the service for more than one business? If the individual works solely for one company there is a high probability that the IRS might consider this individual an employee. If this person works for several companies, there is a likelihood of him being considered an outside contractor.

    In order to avoid problems with the IRS, when a company hires an outside contractor, it must be made clear to them that this is their status and also their responsibilities.

    An outside contractor is responsible for their own taxes, insurance and social security. In addition, they are not eligible for unemployment insurance.
     

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