First-Time Employer, What Do I Do?

Q. I have a pretty new business in Arizona and will soon be hiring my first employees for a big job.  They will be temporary only.  What do I do?  Should I just call them contractors and give them a 1099?

A. Good question and probably one  of the most frequent questions from new employers.  You need to determine the level of control you will have over the workers to decide if these are contractors or really employees.  In most cases, you have employees.

Some of the items to keep in mind when hiring your first employees.

• You will need a federal Employer ID Number if you don’t already have one. You can apply for this online.
• You will need a withholding/unemployment account set up with the state. In Arizona, that happens here. Click on License a New Business and complete the application. This needs to be done soon but not necessarily before the job.
• Submit a new hire report to the state.  This helps the state locate the individual if they owe child support, www.az-newhire.com
• Run e-verify using I-9 data to ensure verify they are eligible to work in the US. Click E-verify enrollment under Tools on the right side. You do need to register before using this service.
• Each new employee needs to complete a form W-4 (federal withholding)
• (In Arizona) Each new employee needs to complete a form A-4 (Arizona withholding). Many states have an equivalent withholding form.
• I-9 (verification of right to work)
• Get Publication 15 from IRS.  This well-written document gives employers the instructions to properly handle withholding and employees.

There are many labor laws that apply as well depending on your number of employees.  To find answers to questions surrounding overtime and other labor laws, you have two options.

1. The Department of Labor website, http://www.dol.gov
2. Your state Labor Department website.  There is a list of those here.

This is a lot of information to absorb for a small business owner.  One other option you may wish to pursue is to contact a local CPA or payroll firm to help you stay compliant.  Your specialty is the industry that you are in, not running payroll.  Connecting with someone who already knows how to do this via outsourcing can make your task much easier.

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.

I Can’t Get An Unemployment Check

Q. I was fired from my job last week. When I tried to file for unemployment, they said I couldn’t claim because I was self-employed.  I thought unemployment was for this reason.  What do I do?

A. Unemployment benefits are designed for employees who are unemployed, under-employed, downsized, rightsized, or fired.  If you were actually an employee, then your employer should have been paying unemployment tax to the state where you performed your duties.  You would then be given benefits by the state if one of the above-listed events actually occurred.

If you are actually a contractor or self-employed, then you are really out of luck.  The problem with your post is that it looks like you assumed you were an employee, but were classified as self-employed.  This may be a sneaky trick by your former employer not to pay taxes for your situation.

There are specific guidelines as to what actually qualifies as an employee vs. and independent contractor.

• Did the establishment provide you an office?
• Were you required to supply your own tools?  This could mean anything from a computer to actual tools used by laborers.
• Were you issued a 1099 at the end of the year instead of a W-2?  While this one doesn’t actually prove anything, it does show the intent of the hiring organization.
• Who controlled the work you performed?
• Who set your hours?

Companies can get into all kinds of trouble for taking the easy route and calling their employees something else.  Check with your State’s Department of Labor for details.

Tax and Reporting Free?

Q. Is there a statement somewhere in the tax laws that states, I can pay someone up to $600.00, tax free to both parties? Or something to that effect?

A. Yikes!  Every time I get a question like this it scares me to death.  “There is no such thing as a free lunch.”  “Certainty? In this world nothing is certain but death and taxes.” You can read more Ben Franklin quotes here.  Your statement illustrates the confusion most people have regarding payments to independent contractors, and the reporting required to the IRS for those payments.

First of all, if you have income, it is taxable.  I can confidently state that Read more »