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Nearly every flooring contractor deals with people who work with him to keep the business running smoothly and get projects completed. The law classifies some of those people as employees and some as independent contractors. This distinction can make a great deal of difference in your business, and understanding this is vital to keeping your business out of serious trouble. Although this article isn't intended to be the final word, here are a few basic principles that will help keep your business on the right track.
It's About Control
In general, an employee is someone who is subject to the control of the employer not only with respect to what work is to be done, but also how the work is to be done. The more control you exercise over workers, and the more detailed the instructions are that you give them, the more likely they are to be considered employees. Conversely, less control and less detail will tend to classify the person as an independent contractor. The law breaks down the concept of control into several parts: behavioral control, financial control, and the relationship between the parties. Behavioral control can involve telling someone what tools or equipment to use, what people to work with, what precise schedule to follow, or where to do the work. For example, your crews are too busy, so you hire a contractor to install 1,000 square feet of No. 1 common strip oak flooring on the first floor of a customer's home. That's all the detail you give him. This contractor is almost certainly an independent contractor, because you controlled relatively little of his behavior—you told him what to do but not how to do it. You didn't tell him what tools to use or how to install the flooring.
To determine financial control, you must determine if the person makes his own investment in equipment, tools, or office space; if he is available to be hired by others; if he has the opportunity to make a profit or a loss; and whether he is paid by the project and not an hourly or annual salary. A person meeting this description is likely to be considered an independent contractor or freelancer, not an employee.
For example, you have a person who cleans your showroom and office every Monday and Thursday evening. You pay him a fixed amount per evening, not an hourly or yearly salary. He brings his own mops and rags to the job. He cleans for another company every Tuesday and Friday evening. This person is likely to be an independent contractor. In contrast, consider an office manager who comes to work in your office every weekday. She often brings plants from home to decorate the office, and she pays out of her own pocket for farewell parties and gifts for other employees. However, you pay her an annual salary, and she does not work for anyone else. Even though she has invested some of her own money in the running of the office, she is likely to be considered an employee.
Finally, you must determine the relationship between parties. This control deals with whether the employee receives benefits, such as sick leave or health insurance, and how permanent the relationship is. A true freelancer is unlikely to receive any such benefits, while an employee normally will receive at least some benefits. An independent contractor is likely to enter into temporary relationships with various companies.
Making Classifications
You may wish to classify a worker as an employee because an employee will typically exhibit more loyalty, can be trained more thoroughly, and will work more closely with others than would a set of independent contractors. However, there are benefits to classifying a worker as an independent contractor.
Since you, as an employer, are not required to provide Social Security, unemployment insurance, and other benefits to an independent contractor, this choice normally will be less expensive and involve less paperwork. In addition, you will enjoy more flexibility—you are free to change the size of your work force as needed for the job.
The golden rule is to avoid treating an independent contractor as someone whom the law views as an employee. Breaking this rule may result in your business having to pay back withholding taxes plus interest. The IRS also could impose significant fines—even prison time—if the violation is found to be significant, long-lasting and willful. State labor departments, which administer unemployment insurance programs, could file suit for back unemployment taxes. And workers who believe that they were misclassified as independent contractors can file private lawsuits seeking overtime pay, retirement benefits, profit-sharing, disability pay and a host of other benefits.
This is truly a distinction that makes a difference.
BUSINESS Q & A
BY JIM BLASINGAME
Q: As a home-based business owner, can I just use my personal checking account for my business?
A: No. You should have a separate account for your business for numerous reasons. If you're using a trade name for your business, you cannot deposit checks made out to the business into your personal account. Other reasons include:
- Separating business income and expenses for tax purposes
- Establishing business credit accounts
- Practicing good accounting procedures
- Enhancing your professional image
You will not be taken seriously as a business professional if you pay your business bills with a personal check. A lot of banks now offer small businesses a low- or no-fee checking account. Check with the bank where your personal account resides to see what business services they can offer.
Jim Blasingame is the creator and award-winning host of the nationally syndicated radio/Internet talk show, "The Small Business Advocate," and author of Small Business is Like a Bunch of Bananas and Three Minutes to Success. Find Jim's show and more at www.SmallBusinessAdvocate.com, plus instant answers to your questions at his small business knowledgebase, www.AskJim.biz.