The Difference Between Employees and Sub-Contractors

Hello, Mark Kohler here with a very important legal tip. We have got to talk about the difference between employees and subcontractors. Now, I know a lot of you business owners out there do not want to fiddle around with W2 wage earners and payroll and payroll taxes and all that. I get it. You want to cut corners. You want to cut your people a check and call them a subcontractor. Give them a 1099 and call it quits. Now, my friends, this is a big risk you're taking because if these subcontractors really turn out to be employees, you could be on the hook for federal and state employment taxes, penalties and interest. On the hook for unemployment taxes, federal and state with penalties and interest. And heaven forbid they get hurt on the job and say, oh my gosh, I'm an employee. I need workers comp. And you don't have workers comp, then you're paying the bill. So I've got to explain the differences here. And it is what it is. You've got to deal with this. What you like to hear it or not. Now, there's a lot of different tests out there to determine the difference between an employee and a subcontractor. However, the IRS gives us the most comprehensive and simplest approach to determining the difference. And it starts with, number one, behavior. Do you control what this person does and how they do it every day, or can they show up whenever they want and do it the way they want to as long as they get it done? Are you controlling every move? And if you don't like it, you tell them on a daily basis. If it sounds like an employee. Yes, an employee. Number two, financial. Do you pay these folks per hour and they get paid for the time they show up and the time they're not there? They don't get paid. Whereas per project, they get the project done and they get a check and they're out of here. Again, if they look and act like an employee, they're an employee. Number three, the type of classification do you call them a subcontractor? On paper, are they given a 1099? Do you have a subcontractor agreement? Is the relationship terminated after a certain time period when the project is completed? Again, if they look like an employee, smell like an employee, and act like an employee, they're an employee. So bottom line, I know it's hard. It's not fun to buck up and pay for the employment taxes that come with the benefit of having someone work for you. I get it. But it doesn't have to be a pain. There are simple procedures for payroll reporting, getting your workers, comp, insurance and quarterly reports done. Get with a company that can help you do it efficiently and affordably. It's going to protect you from potential taxes, penalties, interest and a claim if they get hurt on the job. Folks, you do not want to risk your business trying to cut a corner to pay someone as a sub. Thanks so much for watching and if you found that helpful, please look in the description below. I've got links to my tax and legal library, my QuickBooks training videos, how to start a small business 50, 60, 70 videos, some as long as 30 minutes, explaining more information on tax and legal strategies that will change your life. Also, if you'd like to subscribe to my newsletter or check out my social media links, please click here. There are weekly free tips and strategies and articles that you'll find extremely helpful and I would appreciate it if you'd subscribe to my channel. I've got so many videos here. I produce every week on my YouTube channel and I'd love to give you a ping every time I shoot a new video. Thanks so much and keep living the American dream.