Employee Or Independent Contractor - You decide.

**Wyrd Wind** · 11-19-2009 01:17 PM

All in all, this is a matter of worker's compensation. To my understanding, if an employee is injured on the job, they are entitled to benefits.
This is an e-commerce business, there is no place to be other than their own homes. Thus, I don't see the point in classifying people as employees if they're in no risk of on-the-job injury. But, I digress...

Business Background;
-S.M.L.L.C. in New Jersey

-This is a Home-Based Business. As such, the "main office" is my own room.

-Business is conducted almost entirely over the internet
A. Workers work from their home using their own supplies. I'll probably supply several quick-books to them though.
B. Starting out, I'll be using an Accountant, a Marketer, a Website Programmer, and an Order Processor(s), all of whom are my personal friends. Minus the Programmer, everyone will be solely with my company, as this will be their starting point into their new career. (First time Accounting for a Business / First time Marketing/Etc)

-All are paid on a commission/piece rate payment scheme depending on orders processed/monthly profits respectfully.

-So long as the end-result works out, their methods I don't care much for. However, I will make suggestions on how to carry it out and when it should be done/when to report to me.

-There isn't really a work-schedule. The amount of "work" is determined by the amount of sales we do per day. If we have many orders, the order processor will be quite busy, as opposed to a low order day. Our Marketer will be looking at sales on a day to day basis and forming strategies on their own. I'll make suggestions, of course. Just to give you a few simple example.

-Minus the order processor who gets paid, per order processed, at a fixed rate on my jurisdiction, their pay will be a certain % of profits gained per month.

It seems that everyone has aspects of both. I really don't want to file an SS-8 form, since it may take more than six months, but, if no solid answer is found here, I shall have no other choice.

So, with that said, what say you in your professional opinion?

Cordially,
Wyrd Wind

**cg410** · 11-21-2009 08:49 AM

Based on your description, IMO they are ICs. It has nothing to do with whether or not the individual might get injured on your premises. It has everything to do with the fact that you don't mandate work hours, don't pay an annual salary, and have workers use their own supplies.

**GlobalWealth** · 11-21-2009 03:38 PM

They seem to be IC's. You should do a google search of the IRS criteria for IC/employee classification. You don't want to get this wrong.

**cg410** · 11-21-2009 05:40 PM

Why not? As best I understand, the penalty is pretty small, and that's only if you happen to get audited (rare) and they disagree with you. When it comes to taxes, if you have a legitimate justification for writing something up a certain way that will save you money, do it, and if the IRS comes back to you and says you can't do that, apologize that you didn't know and made a mistake (which is true) and move on. Often times they'll even waive the penalty if you appear to have acted in good faith.

Note that I am not suggesting fraud. I'm suggesting that you do the best you can, and if you make a mistake, it's not likely to ruin you. The IC/employee designation is, after all, a gray area, and often times having the IRS correct your mistakes for you is cheaper than having an accountant do it.

Originally Posted by GlobalWealth

They seem to be IC's. You should do a google search of the IRS criteria for IC/employee classification. You don't want to get this wrong.

**peteVA** · 11-21-2009 09:16 PM

First of all, consider that you are in New Jersey. That, in itself, will tell you that IRS rules may not apply.

Second, Workers' Compensation is insurance and the rules vary widely from state to state. Taxable income / withholding / reporting rules mean nothing to the bureaucrats who run any state commission, or whatever it is called there.

There is an IRS Publication 1779 titled Independent Contractor or Employee, but as I mentioned, that probably is useless in this case.

**rdc** · 11-21-2009 10:53 PM

Independent Contractor Versus Employee : Overtime Advisor

Sounds like they're ICs. But keep in mind, you don't get to classify them. You can write it down any way you want, but the reality (how a court/IRS/etc classifies the situation) is all that matters. You're unlikely to run into trouble as a small business, but I'd say that it's at least good that you're thinking about it now rather than glossing over it.

**GlobalWealth** · 11-22-2009 06:57 AM

Originally Posted by cg410

Why not? As best I understand, the penalty is pretty small, and that's only if you happen to get audited (rare) and they disagree with you. When it comes to taxes, if you have a legitimate justification for writing something up a certain way that will save you money, do it, and if the IRS comes back to you and says you can't do that, apologize that you didn't know and made a mistake (which is true) and move on. Often times they'll even waive the penalty if you appear to have acted in good faith.

Note that I am not suggesting fraud. I'm suggesting that you do the best you can, and if you make a mistake, it's not likely to ruin you. The IC/employee designation is, after all, a gray area, and often times having the IRS correct your mistakes for you is cheaper than having an accountant do it.

While an audit may be rare, the penalties are not small. They are huge. For example if you had 10 IC's working for you earning $40k/yr for the past 3 years and in an audit, it is determined they are employees and not IC's, you will owe the employment taxes, plus penalties, plus interest for all 10 employees for the past 3 years. There is no way to recoup this from the employee either. The reclassification of workers is devasting for many small businesses. In many cases, fatal. As rdc stated, you don't get to decide, the IRS does, or your state depending on who is auditing you. Take the IRS guideline and make sure you have a written contract with each IC signed by both parties and make sure contract addresses each point in the IRS code. While this is no guarantee, it does help if you get audited. I personally have been through this audit in my last company and we passed the test. The critical factors are how are the workers paid, when do they work, can/do they work for other companies, do you provide tools/equipment/etc for the workers. If they are paid a salary/hourly, you control the schedule, you don't allow them to work for other companies, or you provide equipment, you risk reclassification. And depending on the auditor, only one item can make him decide you use employees instead of IC's. And then you are paying attorneys to fight this battle for you in court to prove your innocence. It is good you are thinking about this in advance, but there are huge consequences to getting this wrong.

**cg410** · 11-22-2009 11:11 AM

By "penalty" I meant actual penalty, not back taxes ("the amount you would have had to pay if you would have done it 'right' in the first place"). I can understand how it would suck to pay 3 years of taxes all at once, but the IRS will allow payment plans and IMO would likely waive the penalty (not the back taxes) against a small business that had made a good faith mistake. After all, if the IRS bankrupts the business, save for instances of fraud where it can come after the owner, it gets nothing.

In your scenerio, btw, the amount owed would likely be around $150K, which I'd hope would be survivable for a business of that size. Might not look good for the newly classified employee's Christmas bonus, though.

**GlobalWealth** · 11-22-2009 12:41 PM

Originally Posted by cg410

By "penalty" I meant actual penalty, not back taxes ("the amount you would have had to pay if you would have done it 'right' in the first place"). I can understand how it would suck to pay 3 years of taxes all at once, but the IRS will allow payment plans and IMO would likely waive the penalty (not the back taxes) against a small business that had made a good faith mistake. After all, if the IRS bankrupts the business, save for instances of fraud where it can come after the owner, it gets nothing.

In your scenerio, btw, the amount owed would likely be around $150K, which I'd hope would be survivable for a business of that size. Might not look good for the newly classified employee's Christmas bonus, though.

Just so you are aware, in the event that the IRS bankrupts the business (happens all the time BTW, they aren't the brightest), the owners are still liable for payroll taxes. Nothing, including personal bankruptcy, eliminates debt from payroll taxes.

**Wyrd Wind** · 11-22-2009 09:03 PM

Hm, interesting things.
Though, from what I'm getting, everyone is using the example of if I classified them as IC when they were meant to be Employees...

What if it were vise versa and I went and got the worker's compensation insurance and whatnot?

Are the consequences still the same? Curious.