New Business Starting

Q. Dear Mr. Kerch,
I have read your blog with interest. I will soon start a new business. I will sell advertising to small service-oriented businesses. I expect to recruit agents to sell this service at the local level in small communities. I do not wish to be classified as an employer and thus want to structure the business and my relationship with these local agents in a manner consistent with this goal. I have read the IRS publication employee vs. sub-contractor (19, I think) a few times. It has succeeded in convincing me that there are a myriad of ways in which to fail in my goal. How do I best find and screen the right professional to help me not only set up this enterprise but also review my internal systems of fee collection, commission payment, the provision of agent network working tools, and management of agent network so as not to trigger an IRS determination of employer status? Also, I will need a salesforce software tool (salesforce.com?) and also software for paying commissions.
Ideas?

A.  The document used in determining the type of relationship is actually form SS-8.  In my opinion, the key factor in determining whether the relationship is employee/employer or between contractors is the level of control.

• Are you going to direct the methods used by the reps?
• Will you supply sales leads?
• Will you supply materials and/or training?
• Will you dictate schedules?
• Are the agents allowed to sell other products besides yours to clients they visit?
• Do your reps bid on an area?
• Do you bill the clients and pay the reps based on collections or do they collect and remit to you?

Unfortunately, the main goal of most companies when this question arises is the avoidance of both employment taxes and workers compensation insurance.  Essentially, if you don’t have employees, you don’t pay unemployment tax.  But, if one of these agents files a claim for unemployment if the relationship does not work out, and it is determined that you were actually an employer, heavy fines will be the result.  In fact, the same result will occur if the IRS determines you were actually an employer and did not pay any employment taxes for these individuals.

There is no fee for completing form SS-8 and filing it with the IRS.  Because this is a big audit area and probably a big contributor to the tax gap (estimated unpaid taxes), the IRS is probably going to consider your agents to be employees 99% of the time.

The questions you ask regarding structure are good questions and probably best answered by finding an industry group that closely aligns with your desired business.  Some examples are the NFIB and the NASP. Certains CPAs and business consultants who specialize in your industry can help you with specifics about the type of software that is best for CRM (customer relationship management) and payments to your agents.  Good luck with the new business.  Make sure you have a competent tax adviser around to help you take advantage of all the legal ways to reduce your taxes.  You don’t want to miss any deductions that are due to you.

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