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TOPIC: Helpers as subcontractors??

Helpers as subcontractors?? 25 Jan 2009 12:51 #1

  • Dave Whitaker
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I posted the quote below in response to George's request for an apprentice. It got me to thinking if anyone else has found a way to "legally" take on help as a subcontractor? Our state's workman's comp insurance puts farriers in the same risk pool as coal miners, high steel workers, and underwater recovery divers. The last time I tried to add an "employee", they wanted $23 per hundred of salary for WC insurance alone! It's the one main reason I haven't started a multi farrier business.... I could fill two more books with the work I turn away.

Thanks, Dave


Hay George!

Just a word of caution...... beware the sub contractor/1099 deal. If he/she uses your tools, works out of your truck, works a schedule dictated by you, uses material supplied by you, works in a manner/style dictated by you, and/or receives 80% or greater of their total annual income from you, the IRS will consider them an employee............. don't ask me how I know......

Not sure if it is even possible to set up a legal subcontractor situation in this profession...... my apprentice from four years ago, now pretty much on her own , I consider to be a sub when I send her with her truck, her tools, on her schedule, etc. , to cover horses for me.

It's a real slippery slope, and a potentially costly one.

Dave


"Everything is for sale......some are just harder to buy than others......"
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RE:Helpers as subcontractors?? 25 Jan 2009 13:58 #2

  • Gary_Miller
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Straighty from the IRS Small Buisness Web Site.

Small Business and Self-Employed Tax Center
http://www.irs.gov/businesses/small/index.html

Independent Contractor (Self-Employed) or Employee?

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -


An independent contractor

People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.

An employee (common-law employee)

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Gary Miller, PF

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RE:Helpers as subcontractors?? 25 Jan 2009 14:24 #3

  • Mark_Gough
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Dave Whitaker wrote:
I posted the quote below in response to George's request for an apprentice. It got me to thinking if anyone else has found a way to "legally" take on help as a subcontractor? Our state's workman's comp insurance puts farriers in the same risk pool as coal miners, high steel workers, and underwater recovery divers. The last time I tried to add an "employee", they wanted $23 per hundred of salary for WC insurance alone! It's the one main reason I haven't started a multi farrier business.... I could fill two more books with the work I turn away.


It's a real slippery slope, and a potentially costly one.

Dave

As you have already observed, the government may view 'subcontractors' as employees.

The IRS uses three basic areas to determine the difference between a contractor and an employee.

1. Behavioral Control
2. Financial Control
3. Relationship of the parties

If you can meet the IRS's vague and broad definitions for these areas, you may be able to use an apprentice in a subcontract role. Just make sure that the apprentice is operating his own business and has majority control over that business. It can be done.

Interestingly, large employers (GE, IBM, Dell, Ford, etc) learned a long time ago that they could get around this by using outside 'help' in 'contractor', versus 'subcontractor' positions.

The linchpin that allows this to happen is the 'apprentices' self-designation as a 'sole proprieter' of their own business.

Millions of direct employee positions have since been replaced by the cheaper 'contractor'. The contractor positions often pay as much, or slightly less, than what the company would pay a direct employee. The real savings is in long term benefits (medical, pension, etc).

Many such 'contractor' positions fall under the IRS TIPSS-3 Contracts definition. Basically a 'lobbyed', bought and payed for 'loophole' that big business uses to avoid 'employee' status. Most such positions are IT (information technology) related.

For a small outfit, such operations may not be as cost effective.

You may find that the best answer to the 'apprentice' need can be resolved by identifying the new 'employee' as a business partner.

Many farriers operate their business as a 'sole proprietership' for tax purposes.

Changing that to a 'Limited Liability Corporation' would allow you to take on 'partners' that share in the profit and the risk while avoiding the pitfalls of the subcontractor designator. You would do this if the business need is intended to be long term.

If the 'apprentice' is capable of working alone (own tools, truck, proper skillset, etc), then you might also consider a 'broker' operation. This would allow you to send work to the other farrier, keeping a percentage of the money earned as a brokering fee. That money might be a small percentage of the total fee charged to the customer over some limited period of time. It could also be a single, fixed amount. It's much like another businessman buying a part of your business based on the referral.

I believe that Jaye Perry operates a multi-farrier business and could probably offer a good deal of insight into the topic.

Would make for a good discussion thread.

In my view, step one of taking on an apprentice is to TEACH THEM HOW TO RUN A BUSINESS!

Teach them to fill out a form 1040, 1040 schedule C, and 1040 schedule SE (self employment; social security and medicare, tax for monies in excess of $400 earned).

Give them control over what they earn and, to some extent, how the work is performed.

They should not ride with you. They should follow you in their own vehicle.

Encourage them to buy some of their own hand tools. They need to be able to show 'expenses' for their own business.

If they can do that, it makes it far easier (legal) for you to employ their services in a contractor role.

In short, they become an independent business person, selling their services to you as you teach them your trade. The 'teaching' becomes 'offering general direction' as to what you want done.

Here's an important key point. Make sure, as quickly as possible, that the 'apprentice' has two things!

1. They get a couple of horses to work on that are OUTSIDE your business interest. In other words, give them a couple of pasture pet trims so they can honestly claim that not ALL of their business depends on you!

2. Encourage them to advertise and seek out a few clients outside your book so they demonstrate some growth over a year. Even if it's only a single client. They need to look like a business independent of you.

Sadly, such arrangments leave out the 'rank novice' with no experience or wherewithall.

Here are some important, relatively brief, discussions on this topic from your friendly IRS website.

http://www.irs.gov/faqs/faq/0,,id=199637,00.html

http://www.irs.gov/taxtopics/tc762.html


Cheers,
Mark
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RE:Helpers as subcontractors?? 25 Jan 2009 14:52 #4

  • Mike Ferrara
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It all sounds like too much work and worry to me.
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RE:Helpers as subcontractors?? 25 Jan 2009 18:51 #5

  • Mark_Gough
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Mike Ferrara wrote:
It all sounds like too much work and worry to me.

It does appear that way Mike, but the bulk of the expended effort ultimately falls to the contractor/apprentice. They will be the one doing the paperwork to identify themselves as an independent contractor. Same tax work you do for yourself.

The 'mentors' only role is to write checks and distribute the 1099 form. Same as you would do for any other contract work you need.

Too much work and worry?

Well, yeah... managing our tax obligations in the United States is a bit like having a tooth extracted... via the rectum. :eek:

Imagine a world where you provide a service. The customer pays you for your service. That's it; end of transaction.

Believe it or not... there was a time in this country, long ago, when that was how business was done!

Sounds like a fantasy, huh?

Mark
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RE:Helpers as subcontractors?? 25 Jan 2009 23:07 #6

  • Dave Whitaker
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First,thanks for great replies. After reviewing the referenced publications, it only reinforces my initial concern that it is all but impossible to take on an apprentice and call them a sub contractor.

How would you even attempt to train an apprentice without the business having "a right to direct or control how the work is done through instructions, training, or other means." ?

Instructions and/or training is the very backbone of what an apprentice receives from a mentor, no?

This is just one area that the relationship fails the test.........

Dave


"Everything is for sale......some are just harder to buy than others......"
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RE:Helpers as subcontractors?? 25 Jan 2009 23:45 #7

  • Mike Ferrara
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My concern would be that the "subcontractor" status of the helper might be questioned. The IRS is just about all powerful and unless you really have lots of money to fight, you can't win. Worse, if the help gets hurt and sues...

When I do work for other farriers I usually bill the client directly so there's no doubt. If I had another farrier do some of my work, I guess that's how I would do it.

Given the way this stuff is set up, I don't think I would take on an apprentice unless they were paying me. Then I'm the subcontractor or employee and the head aches are theirs.

I hear the government is getting ready to create a few million jobs. Maybe they have something in mind for new farriers trying to get started. LOL
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RE:Helpers as subcontractors?? 25 Jan 2009 23:50 #8

I don't know USA law but could you take on an apprentice,
saying it's just a ride along party that helped now and again,
and you are just gifting him/her now and again,
The Farrier would pay the taxes on the gift ???

I know there is the reality of possible injury, and liable . . .
. . . when I apprenticed, I didn't get paid, but a lunch,
and if I got hurt, it would have been my "tuff luck" as the saying goes.

This is just an impression that I get, but,
the way you all talk, one would believe
that IRS workers wear revolvers slung low on their leg.

PS I agree with Mike above, about the apprentice paying, would clear up the problem.
Bradley SaintJohn

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RE:Helpers as subcontractors?? 26 Jan 2009 00:06 #9

  • Mike Ferrara
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Bradley-1stChoice wrote:
PS I agree with mike above, about the apprentice paying, would clear up the problem.

Education costs. When I was learning to shoe, My pay came from mucking stalls and all sorts of other barn work.
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RE:Helpers as subcontractors?? 26 Jan 2009 00:41 #10

  • brian robertson
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Imagine if shoeing rates were on the same scale as plumber's, electrician's, millwright's, etc... (notice: union jobs)

Then having/paying apprentices would be NO BIG DEAL. In fact, it would be expected of all of us.

But NOOOOOO, some in this trade are determined to subsidize the ownership of luxury items, by under billing, at the expense of the very future of our craft.
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RE:Helpers as subcontractors?? 26 Jan 2009 00:52 #11

  • Dave Whitaker
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brian robertson wrote:
Imagine if shoeing rates were on the same scale as plumber's, electrician's, millwright's, etc... (notice: union jobs)

.

I'm not cutting my rates!!!!!;)


Bradley:I don't know USA law but could you take on an apprentice,
saying it's just a ride along party that helped now and again,
and you are just gifting him/her now and again,
The Farrier would pay the taxes on the gift ???


Nope....... not in the 'ol USofA

Dave


"Everything is for sale......some are just harder to buy than others......"
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RE:Helpers as subcontractors?? 26 Jan 2009 00:53 #12

brian robertson wrote:
. . . shoeing rates . . . under billing, at the expense of the very future of our craft.

Here here. (in agree-ance sp?)
Bradley SaintJohn

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RE:Helpers as subcontractors?? 26 Jan 2009 01:24 #13

  • brian robertson
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Dave, don't equate shoeing price with hourly wage. Think of shoeing prices to include your hourly wage plus taxes, business costs, health insurance, pension and profit on the capital investment.

Most folks' fee schedule doesn't even come close to cover all the true costs of their business so their hourly rate is closer to Mickey D's wages only without the paper hat.

Mine does but my hourly pay doesn't match union skilled trades and I haven't figured out how to get time & 1/2 for overtime, double time for Sunday and paid holidays. My boss is a real S.O.B.
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RE:Helpers as subcontractors?? 26 Jan 2009 08:28 #14

  • Mike Ferrara
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brian robertson wrote:
Imagine if shoeing rates were on the same scale as plumber's, electrician's, millwright's, etc... (notice: union jobs)

I don't have a plumber out every six weeks and I've never hired an electrician. LOL

Then having/paying apprentices would be NO BIG DEAL. In fact, it would be expected of all of us.

But NOOOOOO, some in this trade are determined to subsidize the ownership of luxury items, by under billing, at the expense of the very future of our craft.

I agree that Average farrier rates are too low however, higher rates alone doesn't make having an apprentice more feasible. Taking on help has to increase profit.

When there was a guild system it wasn't made possible by high fees. In part, it was made possible by a contractual obligation for the apprentice to work off his debt...stay on for a certain period of time after learning how. You could feed/house them and use them for grunt work for years and there wasn't the legal risk and tax/insurance/minimum wage burden that we have now. I don't think that's legal now.

The cut the government wants off the top is a problem. The apprentice doesn't want to pay it, the horse owner doesn't want to pay it and I don't want to pay it. Are we subsidizing horse ownership or is our indusrty just unable to support the burden that the government places on it? WC, SS, MC ect...the apprentice isn't expected to take on any of the risk of learning. Why should anyone else? We're protecting people right out of a job. Add whatever you want to your fee structure. That doesn't mean that people will pay it.

I don't know what the rest of you saw last year but the cost of fuel drove everything up so much that my clients did quite a bit less showing and that meant they did less shoeing. These are people with money...the ones that pay the highest taxes...and you think they should cover the apprentice too? Makes more sense to just eat the horse and forget it.

So where does the trade go? Where is manufacturing going?...at a 28 year low. Do you think that we haven't lost expertise there? I can tell you for a fact that we have.

Who says that you can't take it with you when you go?
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RE:Helpers as subcontractors?? 26 Jan 2009 10:41 #15

  • Mike Ferrara
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Bradley-1stChoice wrote:
This is just an impression that I get, but,
the way you all talk, one would believe
that IRS workers wear revolvers slung low on their leg.

The IRS doesn't need revolvers. They have the power to take anything or everything you have without trial or court order. The burden of proof is on you.
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