IRS Rules......

Are you an Employee or Contractor?

by Curtis Hanvey

This information is NOT being posted as legal advise. This is just intended to act as a starting point so you can further investigate the issue on your own. When in doubt, contact the IRS or your tax advisor. This information comes from public issued IRS information sheets.

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This subject is very important because in the end it determines who pays the second half of the Social Security and like taxes,   The Contractor or The Employer.  Big money when you figure the employer has to pay 7.65% of the employees gross income.  If a groomer has been working for you for a couple years under the guise of a contractor and she has grossed $40000 over that period of time ...THEN if she gets reclassified, you may  owe over $3000 in back taxes that will most likely go to the Groomer to repay her for where she paid it for you those years.  Yes being a contractor simply moves this liability to the Groomer. A plus for the business owner but a cost for the Groomer who must now pay the matching portion of what would have been the Social Security taxes.   Now, remember that I'm not a tax expert but this is what I figured from what I have read. Consult your tax advisor for your real world tax impact. The point I want to convey with this information is...... a mistake in this area can cost you big money plus fines. So be careful how you contract help or be careful if you are the one contracted (know the cost to you for doing this). If you are the one contracted, work like a contractor because you pay extra taxes for that designation that would have been paid by the employer and you need to make sure you charge the business owner enough to cover for this high contractor expense. Here are the 20 factors: 

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THE IRS's 20 FACTORS USED TO DETERMINE EMPLOYMENT STATUS

The traditional tests to determine whether a worker is an employee or independent contractor involve the concept of control: Are the services of the worker subject to the Taxpayer's will and control over what must be done and how it must be done? In Revenue Ruling 87-41, 1987-1 CB 296, the IRS developed 20 factors used to determine whether a worker is an independent contractor under the common law.

Remember: the burden of proof is on the taxpayer; therefore, in general, at least 11 of these factors must show independent contractor status under the common law tests. Any less and the worker is an Employee.

For the following questions, a "yes" answer means the worker is an employee.

1. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?
2. Does the principal provide training to the worker?
3. Are the services provided by the worker integrated into the principal's business operations?
4. Must the services be rendered personally by the worker?
5. Does the principal hire, supervise and pay assistants to the worker?
6. Is there a continuing relationship between the principal and the worker?
7. Does the principal set the work hours and schedule?
8. Does the worker devote substantially full time to the business of the principal? (this is where it is best to be working at multiple shops if you want to be considered a contractor)
9. Is the work performed on the principal's premises? (this is where alot of Groom shops would fail the test. Renting the space from the building owner would help to maintain contractor basis)
10. Is the worker required to perform the services in an order or sequence set by the principal?
11. Is the worker required to submit oral or written reports to the principal?
12. Is the worker paid by the hour, week, or month?
13. Does the principal have the right to discharge the worker at will? (this is important and this is where you better have a contract with the business owner you are working for)
14. Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?
15. Does the principal pay the business or traveling expenses of the worker?

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    For the following questions, a "yes" answer means
    the worker is an independent contractor.

16. Does the worker furnish significant tools, materials and equipment?
17. Does the worker have a significant investment in facilities?
18. Can the worker realize a profit or loss as a result of his or her services? (if you are protected from a loss you may fail this question)
19. Does the worker provide services for more than one firm at a time?(again, if you are a contractor or want someone to be a contractor, you should encourage them to also work for another shop!)
20. Does the worker make his or her services available to the general public?

IF you have a story about how this issue effected you, and you would like to share it with other groomers so we can all learn from it, please send it TX@groomersnetwork.com   and we will add it to this page.