Thread by @roncaruthers

1. Are you a business owner that's expanding?

Here is a long thread about whether someone is a 1099 independent contractor OR should be a W2 employee.

This is going to be technical (apologies), but it may keep you out of a ton of trouble down the road with the IRS

2. I'm not big on disclaimers, as you guys probably know, but this is one time I'm going to put one in.

I know a LOT about taxes, but they change all the time, especially here.

So, it's worth getting an opinion from someone familiar with your situation, and not a rando online.

3. Even if that rando is ME.

OK, so here is the deal:

As your business expands, you're going to need some help.

You can either have help from Independent Contractors, OR you can hire them as employees.

Here is the advantage of having IC's:

4.

First, you don't pay any taxes for them. No FICA, BICA, FUTA, TUTA, SUTA, MUTA.... NONE of it.

(Ok, I made a few of those up just to see if you were paying attention)

But you don't have to pay payroll taxes, provide workers comp, or any other benefits.

5. Also, you don't have to pay minimum wage, although you may have a hard time keeping people if you don't pay them fairly.

And you don't have to withhold anything from their pay and send it to the IRS.

Of course, that is EXACTLY why the federal and state governments hate this.

6. They want their money NOW, AND IC's are notorious for getting behind on their taxes and not making quarterly payments.

Fun Fact: Income tax started in 1913, but it wasn't until the Current Tax Payment Act of 1943 that they began actually taking money right out of paychecks.

7. THEN, you have state governments like California that have pretty much gone to war against IC's with bills like AB5 sponsored by @LorenaSGonzalez .

You may remember her as the State Representative that told @elonmusk to go F himself on Twitter, and then he moved Tesla to TX

@LorenaSGonzalez @elonmusk 8. In fact, let's go check in on her and see what she's up to:

@LorenaSGonzalez @elonmusk 9. Yep. Classy lady, that one.

Anyway, California started the 'ABC Test' to determine whether a worker should be classified as an employee for tax purposes.

Here it is:

@LorenaSGonzalez @elonmusk 10. Under this law, everyone is ASSUMED to be an employee, and they qualify as an IC only if the worker:

A: is free from the control and direction of the hiring entity in connection with the performance of that work;

@LorenaSGonzalez @elonmusk 11.

B. Performs work that is outside the usual course of the hiring entity's business, and

C. Is customarily engange in an independently established trade, occupation or business of the same nature as that involved in the work performed.

@LorenaSGonzalez @elonmusk 12. NOTE: More than HALF of the states have some version of this test, just none as strict as CA's (Thanks for that, @LorenaSGonzalez !)

Now originally, this was directed at Uber, Lyft, DoorDash, etc. that classified their workers as IC's

@LorenaSGonzalez @elonmusk 13. Of course, they then countered and spent $200 million to get Prop 22 through, which basically exempts them from being classified as employees.

In return, they provide their drivers with health subsidies, a wage guarantee and compensation for vehicle expenses.

@LorenaSGonzalez @elonmusk 14. There are a TON of exemptions to this law in CA, btw.

I'll list them at the end.

But, your state likely has some version of these rules also, and you need to be aware of them because even if you're good federally, you can get slammed by your state.

@LorenaSGonzalez @elonmusk 15. Now let's talk about the Federal Government.

Under Trump, they were strongly in favor of laws that HELPED workers qualify as IC's.

Biden, of course, is taking the opposite stance. They're supporting adoption of the CA 'ABC test.'

@LorenaSGonzalez @elonmusk 16. AND, just like they want more IRS workers, they've requested a $30.5 million budget increase to hire 175 new enforcement personnel to combat 'worker misclassification.'

A federal version of CA's law called the PRO Act has passed the house, but likely won't pass the Senate

@LorenaSGonzalez @elonmusk 17. Now what about the IRS? What are THEY doing about this?

For years, they've relied on a 20 point test to determine if someone is an IC or employee.

Of course, that was a pain, so they've broken it down into 3 main areas:

@LorenaSGonzalez @elonmusk 18.

-Behavioral Control: So you look more like an employee if the company has a lot of control over your day to day stuff. You look more like an IC if YOU primarily decide how you perform your work.

@LorenaSGonzalez @elonmusk 19.

-Financial Control. You look more like an IC if you have put money into your business, if you have unreimubursed expenses, and if you run the possibility of incurring a loss.

@LorenaSGonzalez @elonmusk 20.

-Type of Relationship: You look more like an employee if you work JUST for that company; plan on staying there; and get benefits like a retirement plan or health insurance.

@LorenaSGonzalez @elonmusk 21. Confused yet?

Yeah. Remember what I said at the beginning: this is a complcated area and you do NOT want to be paying IC's for years, and then have the feds, your state, or the IRS decide they were employees and make you liable for all that stuff plus penalties.

@LorenaSGonzalez @elonmusk 22. So, what should you do?

Well, let's look at the exceptions to CA's law, since it's the most restrictive:

First off there are a FREAK ton of occupational exceptions.

Everything from doctors to real estate agents to marketers to well, pretty much anything you can imagine.

@LorenaSGonzalez @elonmusk 23. So odds are @WestCoast_Goodz that whom you're looking to hire will fall into one of those occupational exceptions.

If not, there is the B2B rule.

What is that?

Well, unlike the other exemption that requires a specific type of service, this applies business to business,

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 24. Meaning that if you follow the 12 point criteria I'll list in a second, then they ARE IC's and NOT employees.

Actually, I will list that as an addendum after I finish up.

So: should you hire employees or IC's?

Well, here is what I would consider:

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 25. My main office everything, Stephanie, is definitely an employee.

I pay her well, she gets bonuses, vacations (she's coming back today! Whoo-hoo!), health insurance, and pretty much anything else she wants.

Then, I have Alexis who makes calls, handles social media requests

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 26, and sets initial appointments for our clients.

I've never actually met her in person, and I think she lives in NY, but maybe PA (she's right on the line....I can't keep it straight).

SHE is an IC.

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 27. So, if you're getting people to do stuff on and off, IC.

If they're pretty regular and you exercise control of when and how they do their job, employee.

But pay CLOSE attention to the rules and changes so you don't end up in trouble.

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 28. And now you know why I watched Narcos and football this weekend instead of writing this.

OK, if you're in CA, read on to the Addendum:

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 29. So, like I said, CA has the 12 prong B2B test.

Here is what that test is, no matter WHAT the occupation is.

So, remember. Check the exemption list first.

You can read more here: wagehourblog.com/2020/09/articl…

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 30. But if who you want to hire does NOT fall into one of those categories, and you don't want to make them an employee, here is the 12 part test you need to pass:

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 31. Under this exemption, business service providers are ICs if they satisfy ALL 12 of these criteria:

A. free from the hiring firm's control and direction. Put this in your contract.

B. Provides services to the business rather than their customers.

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 32.

C. Have a written contract;

D. have all required business licenses and tax registrations;

E. Maintain a location separate from the business hiring them.

F. Customarily engaged in an independently established business of the same nature as the work being perofrmed.

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 33.

G. Contracts with other businesses to provide the same or similar services, and maintains a client base without restrictions from the hiring firm.

H. Advertises or holds itself out to the public as available to provide the same or similar services;

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 34.

I. Provides own tools and equipment;

J. Can negotiate rates;

K. Can set own hours and location;

L. is NOT performing work for which a license from the Contractors State License Board is required.

@LorenaSGonzalez @elonmusk @WestCoast_Goodz 35. So, remember if you want to have IC's, between these 2 tests, you should be able to satisfy even CA's strict rules.

/end