The IRS is your major impediment to financial success, and it is moving quickly from being an impediment to a full road block. During the year 2000, the total number of IRS agents for “Key Enforcement” was 20,832. The ObamaCare Bill is more than doubling that number of audit agents. The first chunk is 16,500 more agents, but there are several more authorizations for a thousand here and a thousand there.
The IRS is becoming the spy agency for many of the government branches, including the EPA, Department of Labor, OSHA, and of course, the Health and Human Services (ObamaCare).
I have been criticized for writing about ObamaCare before. If you are in love with the program, I apologize, but it really is the biggest tax increase and the biggest tax enforcement bill that has ever been passed. It will be a healthcare disaster you can’t imagine. I know Canada’s system, and am routinely counseling Canadians on how to get to the United States for treatment they can’t get in Canada.
Everything works fine if you are healthy, but if you become critically ill, ObamaCare will substantially decrease your chances of survival. I don’t intend to talk about ObamaCare, just the IRS and independent contractors, but I have to speak out and plead with you to do all you can to get the bill repealed. The silent majority can’t be silent anymore.
Many Americans don’t understand what has happened. I have to speak out, even if I lose some customers. I hope you will stay with me though. I mean no disrespect to the President. Congress should have never passed the bill without reading it first. How insane are they? Pelosi said, “We have to pass the bill, so you can find out what’s in it.” There’s a lot in it – a lot of bad laws. We’re still finding out what’s in it, as the agencies issue their interpretations of the law.
Why Use an Independent Contactor?
So how does the IRS and ObamaCare relate to independent contractors? Well, I am sure you are using independent contractors in your business or real estate investing. Generally, that’s good. There are a lot of advantages to getting work done by an independent contractor, when compared to hiring an employee.
Independent contractors are a lot easier to hire and fire. You don’t have to pay all of the employer taxes, so they are cheaper than an employee. Plus, you don’t have to provide any benefits. That’s a big deal, and it is going to be even a bigger deal under ObamaCare.
Independent contractors often deliver a lot more work, because they are focused on the job, not on the time clock. Independent contractors usually don’t need as much “training,” because they have to do their job for many employers. The bottom line is a true independent contractor adds more to your bottom line than an employee, either that or the independent contractor is gone – you fire him and don’t have to worry about them coming back to claim unemployment on your account. Of course, independent contractors are liable for their own accidents, so for asset protection, hiring an independent contractor really cuts your liability exposure.
Independent Contractor Audits
Never hire an employee if you can get the guy as an independent contractor. Employees are the biggest asset protection threat there is for a small business. No wonder businesses are “hiring” everybody as independent contractors. The problem is someone you consider an independent contractor may be considered an employee by the IRS.
The IRS is dead serious about tracking down employees disguised as independent contractors. One of the audits I went through was disguised as an employee audit, where the IRS was looking for people who they could reclassify as employees instead of independent contractors. The IRS has sworn an oath to come after everybody who might have an employee that they are calling an independent contractor.
The IRS now has a formal three year program where their target is employee classification. They will more than double the number of audits looking specifically for independent contractors that are really employees. The good news is on September 21 the IRS announced an amnesty program.
It’s called the Voluntary Classification Settlement program.
Under the program if you come forward and reclassify your “independent contractors” as employees, you get an easy ride. You do have to qualify for the program. In order to qualify, you need to fill out Form 8952 and then pray the IRS plays the game. They probably will, unless you are already under audit or they have already started to come after you somehow.
The good thing is you pay 10% of the payroll taxes for the past year on the “employee,” and then it is over. All prior years are closed. You reclassify the guy as an employee moving forward, pay the employer’s taxes, and everybody is happy. You do it right moving forward, and there’s no problem. However, the IRS has the ability to audit your future returns for 6 years instead of the standard 3 years. If everything is in order, there’s no need to fear.
The issue is the employment tax. If the guy really is an independent contractor, then he gets a 1099 and pays self-employment tax. If he is an employee, the employer has to pay the employee withholding plus the employer portion in employment taxes. The bottom line is the IRS gets more revenue if the guy is classified as an employee than they do if the guy is an independent contractor. Plus, they don’t have to worry about the independent guy paying his taxes. If he is an employee, then the employer withholds and pays all the taxes up front.
When the tax is just withheld, people swallow the tax a lot easier. In fact, I have actually had a number of people at the seminars this past year tell me that they “don’t pay taxes, because the get money back from the IRS every year.” If everyone got their paycheck without any withholding and then they had to turn around and actually make out a check for all the taxes each pay period, they would revolt. Instituting the withholding program was brilliant on the government’s part.
What Makes An Independent Contractor?
If you are going to have people work for you as independent contractors, you need to make sure they are really independent contractors. There isn’t any black and white standard the IRS uses to distinguish between an employee and an independent contractor. It goes to the weight of the evidence. First, you have to meet the Section 530 tests.
1. Do you file a 1099 for the guy? (Make sure you have him fill out a W-9 before he starts work.)
2. Is there a judicial ruling, prior IRS history, or an industry standard that establishes precedence for determining the guy is an independent contractor? (Is everyone that does the work this guy does classified as an independent contractor?)
3. Have you consistently treated the guy like an independent? If he has been an employee and you suddenly decided he was an independent contractor, you are in trouble.
If the guy is clearly an independent contractor under the three tests above, then you are home free. If there is anything fuzzy about your answers in the three tests above, the IRS will look at more criteria. The additional issues boil down to what control you have over the guy. Answer these question.
• Where does the guy work? If it’s your shop, that’s bad.
• When does the guy work? If you dictate the hours, that’s bad.
• Does the guy use his own tools? If he uses your tools, that’s bad.
• Do you supply the raw materials or does the guy supply everything? If he is using your materials, that’s bad.
• Do you require the guy to do the work, or could one of his people do the work? If he has to do the work, that’s bad.
• Does the guy do the same work for multiple other people or companies? If he’s only working for you, you lose.
• Did you train the guy? If you trained him, that’s bad.
• Does the guy have people working for him? If nobody works for him, that’s bad.
• Who pays the guy’s expenses? If you pay everything, that’s bad.
• Does the guy advertise his services? If he’s not looking for his next client, that’s bad.
• Can you fire the guy if he is getting his work done? If he does his work and you can fire him without a breach of his responsibilities, that’s bad.
• DO YOU HAVE A SIGNED INDEPENDENT CONTRACTOR’S AGREEMENT?
All of these criteria make up the whole picture in determining if the guy is an employee or an independent contractor.
I have written up an independent contractor’s agreement that’s more generic than the one in the Accumulation and Preservation of Wealth set. If you want a copy of it, just call 801-802-9020 or email info@LegaLees.com and put “Lee’s newsletter independent contractor’s agreement” in the subject line. I am developing an independent contractor’s kit that will sell for $79, and this is the agreement that folks will be paying for, but it is a benefit to you, as a newsletter subscriber.
The Bottom Line
Independent contractors are the cheapest, fastest, safest and cleanest way to get work done in your little business or your real estate investing. BUT, the IRS is gunning for anything that is called an independent contractor. You’re the one the IRS will come after, not the other guy.
Be very careful when you hire the guy as an independent contractor. A guy who is almost an employee that you try to fit in as an independent contractor can cause you a lot of trouble. If he doesn’t pay his taxes, that’s your problem. All he has to do is point his finger at you and tell the IRS he was actually your employee. He gets off scot-free, and you get hit hard by the IRS. You pay your taxes and his taxes, because it’s your fault the taxes didn’t get paid. You were supposed to have withheld the taxes and collected them for the IRS. It’s a great way for the guy, who should have been your employee, to get out of paying taxes and get you in trouble.
The most important thing is to have the signed agreement. Then you can at least show the IRS the guy had agreed to pay the taxes. That keeps you out of a criminal charge and reduces the argument to money, not time in jail.
Use independent contractors every way you can in your business and real estate investing. Just make sure they are truly independent contractors.