In Construction, hiring Independent Contractors can get very expensive, very fast!
The Internal Revenue has a defined set of rules on what is the difference between an "Independent Contractor" and "Employee". With all the documentation in place, a person could still be classified in the eyes of the Internal Revenue Service as an "Employee."
When you hire 1099 contractors
You need to know that their state contractor's license, bond, and insurance are active. During audits, state agencies are now looking to check the bond and insurance. Anytime a contractor's license is suspended, the State may reclassify that person as an employee on your job.
Because all fifty states are working with other agencies looking to be sure employee rights are covered, and the state, local and federal payroll taxes are paid. As an employer among your responsibilities are these:
Pay workers’ compensation
Meet wage and hour requirements
Pay unemployment tax
Maintain a safe workplace
Since our office is located in Lynnwood, WA, as example: Washington State Labor & Industries has several definitions to decide whether or not the contractor you hire is really a contractor or an employee, and here are a few:
1. Supervision: Do they perform the work free of your direction and control?
2. Separate business: Do they offer services that are different from what you provide?
3. Maintenance: Do they maintain and pay for a place of business that is separate from yours?
4. Location: Do they perform services in a location that is separate from your business or job sites?
5. Previously established business: Do they have an established, independent business that existed before you hired?
6. Required documentation: May includes other customers or advertising.
7. IRS Taxes: When you entered into the contract, was this person responsible for filing a tax return with the IRS for his or her business?
8. Necessary registrations: Are they up-to-date on their required local, county, State, and Federal business registrations?
Ask your State's Department of Revenue if their business license is active
If they are a construction contractor, check their contractor registration or electrical contractor's license. If they have employees, check their workers' compensation account and claim history. In Washington State, you can do it through The Department of Labor And Industries.
Do They Maintain A Useful Contractors Bookkeeping System?
Do they maintain their own set of bookkeeping records dedicated to the expenses and earnings of their business? Note: If you plan to treat your worker/subcontractor as an independent, make sure you can prove they are. For your protection, you should always ask the person you are hiring to show you a proof; otherwise, you could be liable for all of their employment taxes and all of the employer taxes plus fines and penalties.
Options for additional short term employees:
1. Use a temporary labor service
2. Hire a legitimate contractor
3. Add employee – pay all the taxes
Some construction contractors are finding that by networking with other contractors and working together, they can increase production "on demand" without hiring additional staff. However, it is crucial to make sure they are following all the rules and regulations to stay out of trouble. Before treating someone like an independent contractor, we strongly advise you contact a reasonable construction attorney, and yes I understand, attorneys cost money; however, this is one time when it is money well spent.
About The Author:
Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 206-361-3950 or firstname.lastname@example.org
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