Employee Vs. Contractor Models in Professional Painting

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution. While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decisions. Hello all, this is Daniel. I'm the founder of Bookkeeping for Painters, and I'm here with Richard.

Hey, Daniel. Yeah, I'm Richard Dunton. I am an enrolled agent and I am the tax director for Bookkeeping for Painters. And today we are going to talk about something that I get asked about all the time, and that is, do I have employees or do I have independent contractors? The whole employee versus contractor model, you know, there's pros and cons to both sides, and it seems to be something that is on a lot of people's minds. You know, would you have somebody work for you Do you want to treat them as an employee or would it be better to have them as an independent contractor? So, you know, the biggest difference between them is usually payroll taxes, right? So an employee is paid on a regular paycheck. They're issued a W-2 at the end of the year and you pay payroll taxes. The amount that you're responsible for as the business owner is about 7.65%. and that goes towards their Social Security and their Medicare, and they actually pay the other 7.65% as withholding on their check. Now, an independent contractor is a different animal. An independent contractor technically doesn't work for you. They contract with you and you still pay them, but you don't do it on a paycheck. You don't do it as a W-2 employee and you don't pay taxes on their behalf. It's more of a situation where if you're going to pay them $1,000 to do a job, you write them a check for $1,000 and that's the end of your obligation. Now, there are, like we said, pros and cons to both of these models, and that has to do more than just, just the payroll taxes. And of course, there are criteria. The IRS doesn't just allow you to decide who who's going to be an employee, who's going to be a contractor. They have to fit certain criteria. So we're going to talk to—

yeah, sorry, that's a common question I hear all the time is like, hey, um, should I pay my painters as employees or should I pay them as contractors? It's kind of the wrong question, right?

Right. It's, it's more of how are you treating them, and then that will determine what they are. Uh, that being said, if you know what model you want to go after, you can do certain things to ensure that you are adhering to the IRS criteria and getting what you want as far as employees or contractors. So let's, let's start with employees. Daniel, you've, you've had lots of employees. You have employees now. One of the biggest advantages to employees is control. As a business owner, right?

Yeah, exactly. That's the— that is the, the big defining feature of contractors versus employees. You know, I— that question that I said was, you know, uh, I hear all the time is, should I pay them as an employer or should I pay them as a contractor? Well, my question back to them is, um, what's the level of control that you have over them? Is— so, you know, are they Are you telling them where to be, when to be there? Are you providing all the training? Are you, you know, giving them all the processes? Are you walking them through everything? Or are they more on their own kind of thing where you just kind of give them some guidance, some general things, and then they, they take it from there. They have their own tools and their own transportation, all that good stuff. I have, I have both now and, uh, Bookkeeping for Painters. But, um, when I was running the painting business, We, I had both, but I, we mostly used subcontractors for the, for the work. The crew leads were mostly subcontractors. So yeah, it's definitely, there's a lot of confusion on this subject for sure.

Yeah. I, I was at a painting conference and, and a long-term, a long-time painting business owner. He said, if they're wearing a shirt with your business's name on it, they're probably an employee. And that, that's not all— that's usually true, not always. But it does kind of illustrate what Daniel was saying about how much control do you have over them. If you're telling them to show up at the job at 7 AM, take their lunch break from 11 to 11:30, and wrap it up by 3, they're an employee. You're controlling their work. If you're telling them to use specific supplies and tools and materials, to buy these supplies from a specific, you know, vendor or store. If you're telling them, you know, where to start and where to finish, they're probably an employee. And that, and that can be really good, right? Because maybe you have certain ways of doing things. You know, certainly you want to be able to control the quality. And probably the best way to do that is with an employee model.

Yeah. And to have the counterargument in there, maybe you do have specific times that you laid out for them and you did tell them, hey, you got to use, you know, Super Paint from Sherwin-Williams, you know, on this job because that's what the customer wants. And the customer doesn't want you there from this time to this time. You have to do it in these hours. But they have their own insurance, they have their own business set up, they have their own tools that they're using, they have their own process of painting the house and all those other things stacked up, you know, then, then maybe they are a sub. So you kind of have to look at it like holistically to see what are all the factors involved.

Absolutely. Absolutely. It's not, it's not any one factor. It is a— and this, this is a principle in almost all positions you take in taxation. Facts and circumstances, and it's all the facts and all the circumstances. So there isn't a magic bullet. There isn't— like Daniel said, there isn't one thing. But generally speaking, you know, if you have a lot of control over them, then they're probably employees. Another thing that we can look at has to do with financial. So obviously employees are paid on a paycheck. They might be paid by the hour. Contractors are not usually paid by the hour. They're usually paid by the job. So if you're paying someone by the hour, then you're probably going to want to have them as an employee. You know, another, another aspect would have to be what kind of investment does this person have in the job? If they don't have their own tools, if you're providing them with everything, then they're probably an employee. If they show up with their own truck, with their own brushes or sprayers or rollers and ladders, and that is someone who has a company and that is someone who can probably be considered a contractor. Another thing has to do with like unreimbursed expenses. Right. So, so contractor is, is going to pay for fuel to drive to the job site. He's going to pay for things like tape, roller sleeves. These are not things that he would expect to be reimbursed for because he's not your employee, but you've hired him as a contractor. Just like you wouldn't ask a customer to pay for the gas in your truck to get to their house. You know, a contractor is not going to ask you for that either. And then another aspect has to do with who do they work for? Do they work for just you or do they have other customers? Or I shouldn't say customers. Do they have, yeah, do they have other customers? They have other jobs they do? Or at the very least, do they have the opportunity for other jobs? That would be an indication that this person is a contractor, whereas an employee would work generally just for one person. And then how are you paying them? We mentioned that, you know, hourly versus a flat fee for the job. And if you have a contractor, probably the most important piece of advice I can give you, and seriously, if you walk away from this with just one thing, this is it. Have a signed contract. It doesn't have to be fancy. If you want your attorney to look at it, that's awesome. Doesn't have to be quite that fancy, but a contract that specifies the work that's going to be done and the amount that you're going to pay for it and when it has to be complete. Contractors always have contracts. Employees generally don't. And that would apply for whatever jobs they're doing. So if they move on to a new job, have a new contract with a new price set out for that job.

Yeah, I know. And I've seen some painting businesses, or several, they'll have a contract that covers a certain period of time with the expectations and the— and let me caveat, I'm obviously not a lawyer, so— You're not? Yeah.

Okay.

But I have seen a lot of painting businesses, they do have a contract that covers them for a period of time. With their subcontractor and lays out what the expectations are, what's the relationship look like, and says something like further work orders that you're going to be provided or whatever. So they're not having it signed each job. I'm sure— so that's something that, you know, neither of us are lawyers, probably need to run it by a lawyer to see what they think. But I know common practice from what I've seen is a lot of subcontractor agreements that are signed to cover you for like a year period and then reference the work orders for more specific instructions.

But then the work orders would have— it would be spelled out what work is being done and what the price is being paid for that.

Right, exactly.

Okay. Yeah. So like the work orders are almost like an addendum or a supplement to the contract. Because I guess what I was thinking is like we want to make sure that it's very clear what needs to be done and what the compensation is because these have to be enforced if for some reason, right? Yeah. So we talked about, you know, you control an employee, you don't control a contractor. Well, you can have a degree of control over a contractor. You have to. And that's where those work orders or those contracts are going to come in. Specifying what's going to be done. And as Daniel mentioned, you can absolutely specify this type of paint needs to be used or it needs to be brushed on versus sprayed on because that's what the customer wants. But the fine details, the specific trainings, things like that, you kind of have to let them go at their own pace and you kind of have to let them do their own thing. If they're a contractor. So if you have a situation where you're not entirely sure whether the person working for you is an employee or a contractor, you can actually have the IRS make the determination for you. I don't generally recommend this because usually we have a way we want to go and we might not like what the IRS says. But it is possible. I feel like I should probably at least mention it. It's called Form SS-8. You can fill it out, let the IRS know your facts and circumstances, and they will be more than happy to tell you if you have an employee or a contractor. Now, generally, the IRS skews more towards employees. You know, employees are easier to collect taxes from, so you might not like the determination, But if you have someone working for you, they can also ask the IRS to make this determination. So if you have a contractor, make sure that they understand they're a contractor and that you have these, you know, kind of like these boundaries in place so that you are staying on the right side of that.

And that's a good point because that's kind of the risk there is If you have workers that would be classified as employees, but you're paying them like contractors, the risk to you is that one of them's going to fill out that SSA and ask the IRS like, hey, am I actually an employee and not a contractor or whatever? And then there's also certain states that pay closer attention to this classification. Like, I know California is a big one. But that's the risk to the business owner is if you're not paying attention and not properly classifying your workers as employees when they, when they're employees, when you have that control over them, the risk is that someone might go tell on you with the IRS, basically, or, or a state agency like California.

Right. And if they make that determination that this person you've been paying as a contractor really is an employee, they can go back and force you to pay all that back payroll tax plus the penalties and interest. And you certainly don't want to get in that situation. But let's talk about the benefits of contractors and not just the benefits to you as a business owner, which is obviously it's, it's simpler, right? There's less, there's less work involved, there's less admin involved. But there are certain people who prefer to be contractors. And these are, these are people who generally own their own business. They've already got their insurance in place. They've already got their tools and their supplies. They've got their truck and their ladders. And they want to be able to make as much money as quickly as possible. So that, that's something being, you know, a business owner, a contractor gives them the opportunity to do. Plus, they might be able to take advantage of tax deductions that are not available to an employee. You know, for example, if an employee drives their truck to the job site, there's no tax deduction for that. A contractor drives his truck to the job site. There's, there's tax deductions available for automobile expenses. An employee buys a paintbrush or he, he buys a roller. That's, that's on him. You know, those supplies and materials would be deductible to a contractor. So contractors might ask for a little bit more money than an employee because they are taking on more risk and they do have expenses, insurance being a big one. Big, big thing to keep in mind, your insurance may not cover contractors. So I said, number one, make sure you have a contract. I would say number two is have a copy of their insurance policy and make sure that if something happens, that their insurance is going to cover their, their liability and it doesn't come back on you.

Yeah. Now, oh, I was just—

no, go ahead, Daniel.

And of course, you can't forget the W-9 as well, which is basically from the contractor so that you know, you know, upfront, okay, this is their tax identification number, their address, their business name, and all that good stuff. Um, and that's something that, you know, working with a lot of painting businesses on their processes that I usually recommend upfront, like, hey, when you have a subcontractor when you're doing an interview for them, go ahead and just send them a subcontractor agreement, send them a W-9, and send them, or get their insurance from them. Get those 3 things up front and just say, hey, if you want to work with me, these are the 3 things I need from you. And then you're covered, you know, you're covered in terms of doing the 1099s that you'll need to do on the contractors. Making sure their insurance is squared away and making sure you have that legal contract with them, but also covers you for workers' comp audits down the line. Because when you have workers' comp and you're covering, if you're covering your subcontractors under your workers' comp, you got to make sure you have that documentation. For your workers' comp audits in a lot of cases.

Yeah.

Yeah.

And if someone's not willing to provide you that W-9, that's probably not somebody you want to contract with. As you know, as someone who pays a contractor, you are obligated to make a good faith best effort at getting these W-9s. And the reason is, is because at the end of the year, you will need to issue a 1099-NEC, stands for non-employee compensation, to anyone who you've paid at least $600 in cash, check, or cash equivalent. So that's a mouthful, but basically anyone who's worked for you, you've paid them more than $600, and you did it with something other than a credit card, you're going to want to issue a 1099. There are some exceptions. If they're a corporation, then it's not necessary. But most subcontractors are going to be an LLC, a sole proprietorship, some kind of disregarded entity, and your W-9 will tell you that. But you're going to want to issue that 1099. Those come out in January and they need to be filed by January 31st. Yeah, we do quite, we do quite a few W-9s or 1099s for our clients who use contractors. And once you've issued that 1099, then your obligation is over. The contractor is then obligated to report and file their taxes. That's, that's their business. You've done your part by issuing that 1099. And you can do that. You can, you know, you can certainly have your accountant do it. If you like to do it yourself, you know, you can buy forms at, you Office Depot, Walmart, wherever you like to shop for IRS forms, or you can download them for free at IRS.gov. But one copy goes to the IRS, one copy goes to your contractor. So make sure you are doing those 1099s because there are fees and penalties if you don't issue them by January 31st.

You know, going back to, you know, which is better, contractors or employees, A lot of folks feel like they, they, they should have employees because that looks better to the client. You know, when you have your own employees, some people feel that way, you know, and then, and others like the convenience of a contractor having a squared away crew that can handle that. And I've seen it both ways, like both models, even mixed models have worked well for other painting businesses. So I think, you know, from what I've seen, is just whatever you're comfortable with. And I know a lot of people struggle with, you know, how to— if they do use contractors, kind of the big downside. You talked about a lot of the, the, the pluses to having a contractor. One of the big downsides is that if you're— if your client asks like, hey, do you use employees or contractors, or subcontractors, you know, or, you know, that's like, oh, I don't want people to know that I'm using, you know, contractors or subcontractors. Yeah, that could be viewed as a, as a downside, which was something that we had to deal with. I was running a painting business because our, one of our main competitors, they used employee model and we used contractors. So they used to be like, because they were bidding on the same jobs all the time, they used to always undercut us and say, "Oh yeah, be aware of those guys because they use subcontractors." So we had to come up with a counter-narrative to that, and we had a whole script. I helped the salesperson write a script on how to basically handle this objection up front, and it was something to the effect of, "We want to make sure your home gets the best painters." And the fact is the best painters in this area, they've been painting for 20+ years and they want to work for themselves. They're unhireable because they, they know how to, they have their own processes, they know how to do things. And so that's why we work with subcontractors is because we want to have the best painters on the, on your jobs, on your, your project. So that's kind of how we positioned it with customers upfront. And we're kind of transparent about it, but that's kind of the, I guess, the bigger downsides. And then the other one you mentioned is paying them. You kind of have to pay contractors a bit more money, and that we definitely see that on the, uh, the financial side of things. You know, employee labor as a percentage of revenue kind of runs, you know, around, uh, 30% of the, of the job, 30 to 35% of the, the total job, maybe, maybe inching up towards 40. That's kind of the ballpark range. But subcontractors are like 35, 40, 45% as a percentage of revenue. So they're definitely, um, a little bit more expensive.

More expensive because they have more costs, but also maybe it's a little bit easier for you to budget when you know that labor is going to be a fixed amount. You're taking some of that risk off yourself and you're putting it on the contractor. Whereas with employees, if you have cost overruns, it's taking longer than you thought it would, then that's hourly wages that are coming out of your pocket. So definitely, I mean, there's definitely pros and cons to both sides, and what's going to be right for you is going to depend on your circumstances. Um, and I, and I, Daniel, I guess I love what you, what you said about kind of flipping the script, right? Because, you know, contractor does not necessarily mean cheap or inexperienced. Contractors can be people who have been in this industry for decades, and they don't want to work for somebody else because they know their value and their worth, and they know that they can do a great job without supervision and without somebody else, you know, looking over their shoulder. So it's going to depend on, on a lot of different things and getting that, that vision that you have across to your customers, whether you have employees or contractors, helping the customer feel comfortable about who's going to be in their home and who's going to be doing the work. I think that's really key.

Absolutely.

So, well, if you have questions about employees or contractors, we would love to hear about it. You can follow us on the Grow Your Painting Business Facebook page and let us know what your questions are. Hey, this is my situation, you know, am I running the risk of crossing over to that contractor versus employee line? What's your opinion on that? And we'd love to hear about what works for you. Do you use employees or do you use contractors or do you have kind of a hybrid model where you're using both? So we'd love for you to be able to follow us on Facebook. We post a lot of really good stuff and we'd like to hear your feedback as well.

Yeah, absolutely. And I think from here we'll go ahead and sign off. I hope everyone has a great week and we'll see you next week.

Yes, thank you for listening. Bye now.