Independent Contractors In Construction
As a construction accountant, whenever a contractor client tells me they are thinking of hiring someone as an Independent Contractor it is like dragging nails on a chalkboard because I have seen what happens when that decision goes bad. When it goes bad it is worse than moldy cheese in the hot room with no ventilation.
So my advice is talk to your construction attorney before you treating anyone as a 1099 Contractor. You will be glad you did!
Three Common Phrases Used By Construction Workers:
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“I want to be an Independent Contractor so I can work when I want to!"
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"It’s only Part-Time!”
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"We will both save money in taxes"
That last one is the deadliest one of all because what do you suppose will happen when the so called "Independent 1099 Contractor" will do when faced with an IRS Audit for unpaid back taxes, fines and penalties? The two main options are:
A. Take the hit and pay the taxes fines and penalties
B. Suddenly realize they were innocent victims of a big bad contractor
Just expect them to take option "B" and you could be the one paying all of the employee taxes, the employer taxes, and all the fines and all the penalties. Don't take my word for it ask your attorney or do the research.
There has been article after article written trying to explain the differences between what is commonly known as a 1099 Contractor and a formal employee and yet contractors are still paying a heavy price financially, emotionally and mentally because of the myths being told.
Most people think as a 1099 Contractor is really for when they are doing something trivial (less than $600 for any one person) it’s not that much. It’s no big deal. It really doesn’t count. It’s too much trouble to become an employee for something so small. Everybody saves money and everybody does it so it must be OK!
Reality Does Not Always Work That Way
It is more proper to think in terms of professional services firms. You may have to send to the Internal Revenue Service a 1099 form for the work professional service providers perform and they can and will provide you with their Federal and State tax identification numbers to document they are licensed businesses.
Perform a Goggle search of the phrase “1099 Employee” and what may show up is “1099 Contractor”
The Internal Revenue has a defined set of rules on what is the difference between an “Independent Contractor” and “Employee” With all the of documentation in place a person could still be classified in the eyes of the Internal Revenue Service as an “employee”
http://www.irs.gov/businesses/small/article/0,,id=179115,00.html
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
Comparing State Rules And Federal Rules
This is not a case where trying to follow the Federal rules will keep you out of trouble with your local city, county or the folks your area for example the law makers in Olympia the capital of Washington State have ever changing rules about what employers need to do to be compliant with both Federal and State rules, depending on the situation.
In Washington State the rules are more clearly defined. Independent Contractor = Business Owner or the person is actually an Employee. It is services provided or wages paid from the first dollar earned. http://www.lni.wa.gov/IPUB/101-063-000.pdf
Options For Short Term Employees:
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Use a temporary labor service
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Hire a legitimate contractor
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Add employee and pay all the taxes
Do you have a small job?
Some construction contractors are finding that by networking with other contractors and working together they are able to increase production “on demand” without hiring additional staff. However, it is important to make certain they are following all the rules and regulations to stay out of trouble.
Conclusion
Before treating someone like an independent contractor we strongly advise you contact a good construction attorney and yes I understand attorneys cost money; however, this is one time when it is money well spent.
QuickBooks Expert Specializing In Construction Bookkeeping Services
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. http://www.fasteasyaccounting.com/sharie-dehart/
