Be Better at Business Podcast

Podcast 1 with Equilla Harper, CPP, First Star HR

June 09, 2019 Season 1 Episode 1
Be Better at Business Podcast
Podcast 1 with Equilla Harper, CPP, First Star HR
Chapters
Be Better at Business Podcast
Podcast 1 with Equilla Harper, CPP, First Star HR
Jun 09, 2019 Season 1 Episode 1
Eagle Employer Services
1099 Contractors vs W2 Employees
Show Notes Transcript

Is your company correctly 1099'ing subcontractors, or should those workers be paid as W2 employees?

We talk with Equilla Harper, Tax Compliance Manager of First Star HR to discuss 1099's subcontractors, W2 employees, and the difference between the two.

This podcast is available on iTunes, Spotify, and more!

Speaker 1:
0:00
You have to be very truffle as an employer to make sure that you don't misclassify someone because if you treat them like an employee, but you pay them as a contractor, meaning that you don't, uh, withhold the taxes and remit the taxes on the employee's behalf as well as match the taxes. But you're telling them what time to come in. You're telling them what their job responsibilities are on a day to day basis. So really it's like an employer has direction and control. Whereas if you're a contractor, you guys discuss the task that needs to be done and then you discuss the price and then it's up to the individual that you contracted to get it done.
Speaker 2:
0:55
Hello, team Eagle. This is eagle employer services here posting our very first podcast. Uh, we were lucky enough to, uh, interview Equilla Harper, a CPP up at first SAR HR and she was, man, she gave us some great information. I'm your host Mike and this is Lynwood Smith and man, this is a lot of fun. Looking forward to it. Aquilla has a lot of great information. I know you, we'll look forward to hearing what she has to say and how it may concern your business.
Speaker 3:
1:29
[inaudible] [inaudible]
Speaker 2:
1:31
welcome to equal employer services podcasts where it's all about graduating from an employer by accident to an employer on purpose
Speaker 3:
1:39
with [inaudible].
Speaker 4:
1:46
Well, you're about ready to get started.
Speaker 1:
1:48
I'm ready. I'm ready. So I take it, it's gonna be like a dialogue. You're going to ask me a question and we're just gonna talk like I'm sitting there like, it's like we doing in the office.
Speaker 2:
1:59
It's going to be very serious and you can't get any questions wrong.
Speaker 5:
2:03
[inaudible] just kidding.
Speaker 2:
2:07
Oh really? Right.
Speaker 4:
2:08
Well, Aquilla uh, we were, uh, as we've discussed and um, talked to a number of, uh, let me start that over.
Speaker 2:
2:17
Is scratching his nose here. I've done that before on TV and they had the edit it all out and start over and come refilm everything. Look at this thing right here
Speaker 5:
2:28
or what's on my computer.
Speaker 4:
2:32
Oh, man. Well, uh, as we've, as we've discussed before and we've talked to just so many contractors over the years, and I've been a contractor and I've known them and from you know, all of our experience, one of the things it's common for everyone to use as a 10 99 for their employees. And uh, and one of the things we run is why would I want to go from using 10 99 to a w two and I guess the first question would be what is technically a 10 99 what type of an employee is that?
Speaker 1:
3:17
A 10 99 employee. Typically a contractor, someone that's hired to do a job and a price has already been this status prior to them doing the job. So sort of like a contract, you know, where,
Speaker 2:
3:37
sorry. And really the term 10 99 employee, we use it because it, it's something, it's a term everyone uses, but really it's there, there are two different things there. There's, they're either a 10 99 or they're an employee, but there's no such thing as a 10 99 employee.
Speaker 1:
3:53
Correct? Correct. You are either a contractor where you're responsible for paying your own taxes. And that's typically those that receive 10 99 they pay their own taxes. But if you're an employee, taxes are deducted from your pay automatically. So if, if you are, if you get a 10 99 that individual is responsible for meeting those taxes to the IRS themselves versus on the other side where you an employee, the employer, your that decks that taxes from your pay and remit it on your behalf. So back the difference
Speaker 2:
4:38
and the incentive to do a 10 99 if you're wanting to pay somebody versus a w two employee is there's a few taxes that are applicable on top of that. Where if you 10 99 it's just straight wages. Is that correct?
Speaker 1:
4:55
Well, if you are an employee e for an employer, the employer year has to match the ICAP portion and the Medicare portion of your taxes. So as an em, as an employee, when we get our paychecks, we're in the state of Texas. Various, no state were coding taxes. So as an employee, we don't pay state taxes, but we do pay better role and we do pay social security, which is caused by [inaudible] and the medic share portion, which is for later in life. Hopefully it's, some of us have 30 checks, but the match that just the security piece, not the federal piece by the fit, as people will see that on their paycheck stuff, they just match the Sika and the Medicare portion. Whereas if you're 10 99, you are responsible for all of that yourself. And you do realize that employees that are paying into that social security, the whole purpose of doing that is in hopes of some day retiring and being able to draw social security. But I will tell you the workforce right now is finding the social security checks for the boomers and stuff that are receiving social security now.
Speaker 4:
6:27
Yes. Uh, and has been doing that for awhile. But regardless when you, uh, so you have, uh, a 10, 99 and he's basically a supposed to be a contract, which, which means a, he's not a daily worker. He's not somebody that is, is, is directed. What to do on a daily basis. Is that correct?
Speaker 1:
6:54
That is correct. Being a contractor, it just means that you're responsible for everything. You know, your own medical coverage. We don't offer you four, oneK and dental vision. You're pretty much there to do whatever job you quoted the employer that you would do. You discuss the job, you discuss the timeline, and you discuss the pay that you want to receive for doing the job as an employer. When you hire contractors, you are not in control of how the work is being performed. You don't dictate to them, you know, take a lunch, take a break or anything like that because that would be considered an employee. The contractor uses his own tool, uh, provides most of the time, his own. Um, I guess if it's a job where it requires other workers, he would have his other laborers. So it's totally different from an employee, employer relationship and an employee and employer relationship. The employer pretty much dictates the job that is done, the timeframe that it needs to be done. And they also offer them benefits whereas you wouldn't a contractor.
Speaker 2:
8:22
Are there exceptions to the rule when a, uh, when an, when what you would think falls under that category as an employee would actually be considered a contractor? I know like hair salons and mechanics a lot of times. I guess it's since they bring their own tools, would that would be kind of the differentiator that would make them, I know commonly they are 10 99 rather than w two employees. What differentiates the two in that circumstance where there is some things that seem to look like they would match the w two employee model, but you know, they're showing up to a central location every day there. You know, a lot of things maybe even dictated the hours yet, but yet they're somehow sent like an exception in the rule
Speaker 1:
9:18
or are they, you have to be very truffle as an employer to make sure that you don't misclassify someone because if you treat them like an employee, but you pay them as a contractor, meaning that you don't, uh, withhold the taxes and remit the taxes on the employee's behalf as well as match the taxes. But you're telling them what time to come in. You're telling them what their job responsibilities are on a day to day basis. So really it's like an employer has direction and control. Whereas if you're a contractor, you guys discuss the task that needs to be done and then you discuss the price and then it's up to the individual that you contracted to get it done. Meaning that, you know, you're not standing over them saying, okay, I need you to do x, y, z. That's already been pre determined, but an employee in the workforce, things change from day to day. If someone's out, you need them to fill in. But that was a perfect example that you gave about [inaudible] because a lot of the stylists are contractors. But I do know like at a lot of the JC penny's, which is a department store that has a salon in it, a lot of those, our salon stylists are actually employees and it's because they is to be,
Speaker 2:
10:56
depends on the responsibilities
Speaker 1:
10:59
[inaudible] it's a benefit for them. They would prefer to be an employee and be paid hour on h. And M in a lot of cases they want to come, they want the insurance coverage.
Speaker 4:
11:09
I have one more question. Acquilla I'm sorry. Apologize for interrupting. But W so let's, like is there a situation where your actions overrun your contract? For an example, let's say that, uh, someone has you, you, you've signed a paper and you are a DBA and you a, you're an individual and you've got your social security, but you've, it's a Linwood DBA, framer and, and so the, so I'd get a check, but uh, from him, every week I get told where to go to work, what time to show up what I'm doing and all of the actions that I'm doing. And I would get paid a weekly check, uh, based on being told and directed as to what to do. I didn't bid the job. I'm being treated like an employee except for the fact I'm getting a 10 99 because I am a subcontractor and I'm being paid as the Linwood framing. Is there a point where the IRS overlooks that because I'm being paid as Lynwood framing versus Linwood Smith yet being treated like an employee.
Speaker 1:
12:27
That's a little dangerous. And let me tell you why you don't hire a contractor to work for you and entire year after year after year, a contractor is basically someone that's been it for a job. Maybe not necessarily bid it, but they are coming in to perform a function that perhaps your employees cannot do, but if you have this person around consistently, then that's a red flag because are they really a contractor or really are, should they really be an employee?
Speaker 4:
13:06
Okay, and then how's the w nine used in relation to a 10 99
Speaker 1:
13:12
the w nine is, I think the best way to to describe it is when you an employee, you complete a w form and on that w for our an I nine you're putting your social security number, et Cetera, et Cetera, everything about you so that you can be paid properly. That in essence is kind of similar. That's what a w nine is for a contractor. They are providing us with their either their federal ID number that they've received under their business and in some cases people use their socials, but they're providing us the information like their name, their social or their FDI in and the address so that the 10 99 is, you know, mailed out correctly.
Speaker 4:
14:05
Okay, I see. Very interesting. I didn't know that
Speaker 2:
14:11
the 10 99 deal is so common, like in our area, construction is booming. Um, and like so we're, we're very familiar with it and we know a lot of people just in our, I mean anyone that knows construction knows man, everyone, everyone's 10 99. Um, and a lot of times I'll hear that there's a, a Debby nine used and I think there's the impression that it adds like a layer of protection. I think a lot of times people know, uh, they should probably be 10 99, but I mean I'm or probably be a w two employee, but you know, I do the 10 99 and I do the w nine. It almost feels like there's this impression of well if I'd, I do all those things. It's like a layer of protection is, is that the case or no,
Speaker 1:
15:02
no, that's not the case. Again, mainly it's for inflammation purposes so that they are there. Keep in mind an employer is going to report the 10 99 data to the IRS, just like say I'm sorry to first security administration just like they are. I've been deputy to, so when that individual files their taxes, they already know the income that they've made, whether they choose out or not. And so it's not a late layer of protection. It's protecting the employer year because if they're ever audited and they want to look at, let me see all your 10 99 people, you know you have the documentation meaning that that individual sat in your office and they gave me that information with the understanding that they are not an employee, that they are agreeing to be a contractor because of the job they had to be at. In a lot of instances what people will do, and I've seen companies that have this issue when we submit the file, the 10 99 pounds, which you have to submit a transmittal, which is the 10 96 once the IRS gets that file, if the numbers meaning the social security number or they FCI in doesn't match the business or the the person's name, the foul will kick out as a mismatch.
Speaker 1:
16:40
And I'm sure you guys have heard about the mismatches on the W2's for social security numbers or there's a mismatch. It can occur with a 10 99 as well. And so it goes back to the employer and the employer can be fine and penalize for submitting, you know, in valid are mismatched numbers, but they give you the opportunity to get the correct one. And so if an employer is not collecting those and keeping those, you know,
Speaker 5:
17:15
yeah,
Speaker 1:
17:16
thank you. Shit. They just should for audit purposes and as well as trying to clean up a information when you get those notices from the IRS.
Speaker 2:
17:27
Have you ever heard of an employee, and I know you've been doing this a long time, but have you ever heard of an employee finding out that, you know, maybe they've owe a bunch of taxes that they weren't expecting or they weren't, uh, they weren't prepared for it. They did get 10 99 they agreed to be 10 99 contractor kind of understood what it went through, but of a sudden
Speaker 4:
17:50
they find themselves owing a bunch of taxes that they weren't expecting. And when they go meet with a, an IRS agent or they talk to their tax expert, they say, well, explain to me how did you get in this position and, uh, are you a contractor and that, is there a form or is there something they report to the IRS to say, Hey, look, I'm not responsible for all of this. I was an employee even though I signed saying I was 10 99.
Speaker 1:
18:19
That's how the, uh, that's how the audits get started because someone will go in and say exactly something similar to what you said. Oh, I didn't know. But they did know that they were not having any taxes deducted. So I mean, for defense, for the entire year one, you have that w nine on file until you will have in your records where you paid them for whatever job. And you just have to be able to substantiate that regardless of what that individual tales one of the, um, representatives at the, on the government level,
Speaker 4:
19:00
at the government level, would they be interested in finding out, uh, what his duties, his daily duties were and kind of investigate it as to determining whether he was an employee or a contractor or would they just kinda let it go from standpoint that, well, this guy's, he couldn't pay his taxes and so he's just trying to put the blame on the employer?
Speaker 1:
19:21
Well, I think they will make a call. Just like when you have, uh, employees that vow unemployment, they're gonna place a call to the employer in a lot of cases just to, um, you know, validate one way or the other. Now, does the IRS have a lot of resources? Right, ma'am? No. I mean, what is their criteria for making their call? Because I can imagine they probably get a lot of instances where you have a similar situation. I can't verbatim state if they call them every last one of them. Or what I can say is, as an employer, you want to make sure that you have the documentation, you know, so that you can show that, you know, if you were audited, you did your due diligence and your due diligence would be talking to that individual. In a lot of cases, if you can have a contract where you're saying, I want you to build this shed I needed and you will have the job done in a month and I will pay you x amount of hours. It's just good for employers to have documentation of whatever agreement that they made with the individual to cover themselves.
Speaker 4:
20:42
I know with sterling and I, I don't know if you were the large staffing company, I don't know if you involved with this
Speaker 2:
20:48
decision or not, but like with ACA reporting and they were looking at the cost of, okay, do we row, do we, you know, do all this reporting stuff where we were, you know, we calculate who's eligible versus who's not. And then we, you know, we develop an expensive formula with lawyers to sign off on it and blah, blah blah. Or, and I know the ultimate decision was, you know, it's to dot our i's and cross our t's. It's actually gonna just be cheaper if we offer it to everybody and do it that way. Could you foresee a similar situation where to really sleep good at night and to, if you have subcontractors that maybe legitimately are or are it's gray area, but to really qualify you're going to have to do all the things you just mentioned each job, each this, each that, the other records where if they're an employee you don't that you know, some of those expenses go down. Is there a scenario or is it always cheaper to just 10 99 everybody? Is there a scenario where you know to, to do it right, it would cost as much money to just make them a w two employee and I'm not liable for the reporting?
Speaker 1:
22:08
Well I think it just depends on the business structure. Like, let's just take construction companies for example, that typically work by project their project, you know, driven and then their, you know, a lot of times they have seasons where the work is not, they don't have a lot of work. So there's, there's a flip side, you know, in each employer would have to look at their situation because let's just say if you did offer it to everybody, just to be safe, make everybody in, employee, keep in mind there are a lot of employee your taxes and when the work is not available, those individuals are going to go and file for unemployment.
Speaker 2:
22:55
[inaudible]
Speaker 1:
22:55
and so when they go file for unemployment, you are paying unemployment taxes, but because you have people filing unemployment, it could potentially make your unemployment rate go up. So it increases the employer's liability. So I would say, you know, as an employer just, which of course we can't give legal advice, but yeah, look at how much revenue you're making.
Speaker 2:
23:23
It is more expensive to happen, uh, an employee. But the way, the way we do things here, and I think this has been our approach, uh, and I think it's the best approach. It's always cheaper to do it right. Uh, okay. Well even if you have a lot of jobs, you have a core of employees
Speaker 4:
23:47
that work for you all the time and if your 10 99 them, then those should be w two employees. If you've got a group that they do a job for you here and they're off and they're off doing a job for somebody else and then if you're not busy, they're not working. Those are 10 99 contractors. It's real simple. But if you've got a core group of people that work close to you and they work for you every day and they're, you send them out, those are employees
Speaker 1:
24:14
and that's how they were. The government will probably look at it, you know, the federal agency because here's what they're looking at. I agree with what you said they're looking at, is this company trying to avoid paying taxes? You know, like you said, if they work for you all the time and you count on them and they're your core team, they should be employees. But if it's like some someone with a specialized trade and you only need them periodic pain, I wouldn't, I would say they could potentially be a contractor. But if you choose to make anyone a contractor, just make sure you got your i's and cross your t's by having that w nine and having the agreement of what you and that individual decided needed to be done. And what's your opinion
Speaker 2:
25:11
and the history of all projects
Speaker 1:
25:15
with that individual? Yes.
Speaker 2:
25:17
We talked earlier about a trigger that could, uh, or a situation that could trigger an audit where like an employee owes taxes. They're talking to the IRS and they say, you know, anyways, we talked about that. Are there any other triggers like that? Is there any other situations that you know of that could trigger an audit? For instance, if an employee has one 10 99 from one person for all their wages or six you know, and if it's, if it's a majority of their wages even or year after year like, or is that a situation that could trigger an audit from the IRS? Say this doesn't look like it's an I nine contractor. If they only have one, you know, to 99 I don't know. Is that a situation that could trigger an audit or or do you know of any other situations
Speaker 1:
26:06
when it comes to 10 99 typically the person cannot be both in an employee and a contractor. In most cases that's a red flag.
Speaker 5:
26:19
Okay.
Speaker 2:
26:20
What if they were only a 10 99 say say I'm working for Eagle and year after Year Eagle 10 99 is me. I'm not a W2 but year after year I get 10 99 and when I submit my taxes, 100% of my wages are from are not wages, 10 99 earnings or whatever you want to call it. If I submitted my taxes one to 99 from one company year after year with, could that cause a red flag in their system to trigger an audit?
Speaker 1:
26:56
Yes, I would think so. It depends on what type of company it is. Because if you are, it's like when we talked about earlier, it's the consistency, you know, if you aren't constantly, if you're going there 300 at 365 days a year, but if you're working 52 weeks out of a year is the same employer our same business. You know, they will look at first what type of business is it?
Speaker 5:
27:26
Okay.
Speaker 1:
27:27
And to, um, that just doesn't, that just doesn't add up.
Speaker 2:
27:33
I've always wondered, you know, I know what's the 10 99 I don't know it to the, to the t, but I know when there's someone that's blatantly an employee and they're being 10 99 but you know, the problem is so, so many of these good, you know, the people that want to do it right. You know, they see all these people around them doing it and no one's getting audited. Do you think the IRS looking at the industry and that kind of being an industry norm, I've always wondered how, how to none of these guys get audited. I will say, uh, the, it happens, it's, it's rare, but it would be me. I would be the one that would get audits. How do you, how do you, how do you explain that? What to me seems a little bit like a phenomenon like, well, if it's wrong and everyone's doing it and no ones or very few are getting audited and panelized [inaudible] I have a hard time wrapping my head around that.
Speaker 1:
28:27
Well, look at it this way. My, if it's construction, if it's a Roofer, we know without a doubt that they will not consistently work all the time because there will find, there will be, there's the winter, you know, where you're not going to be on the roof if it's snowing or if there's ice on brown. And so that's why I say that they look at the industry, but if there was a barber, you know, or if it was a,
Speaker 1:
29:02
let's see, let me think. Like, maybe, I don't know, a doctor or nurse, you know, which they're 10 99 a lot of them. Cause they do, I'm just trying to think of a good example, but if it's anything that you are consistently doing, probably a nurse when getting, you know, they wouldn't even look at that much because a lot of 'em they don't want to be employees. They want to go from location to location. They enjoy doing that. But let's say our company, if it was a staffing company, you know, probably not because you are going to that staffing office who has direction of control of where you go next.
Speaker 4:
29:45
Well, it sounds like to me there's a, there's room for these guys to two 10 99, uh, people that do work for them in consistently and uh, there. But there is, you know, and like you said, because of the fact that they work in consistently a verifies that they are 10 99 contractors, even though maybe technically they're having them show up at work early and they're giving them their hours. Uh, the other side of it is, is it's not regular work. And so there, there is a sense of a rationale that goes into a, can I enforce this being 10 99 subcontractor versus being a w two employee,
Speaker 1:
30:33
right. Because you know, you're going to have a period where you don't have anything for them to do. So what are you going to do? Lay them off?
Speaker 2:
30:41
Yeah, I'm afraid. I don't want to come across to anyone listening like, hey, you should never 10 99 and all this, the best way to succeed longterm is to do it right. And uh, that, that's our goal here.
Speaker 4:
30:55
Thank you Aquilla for being with us today.
Speaker 1:
30:58
It was a pleasure to be with you guys. I mean ultimately my goal and the reason why I do what I do is one, I enjoy it and then I like helping people and like you say, there's a little work on the front end but it pays off on the backend a lot.
Speaker 2:
31:18
We've seen it weekend, week out. We've seen you, we work with you. I don't know if, and if the listeners know we work with Aquilla in what we do here at Eagle employer services. She's a part of our corporate team. You're the CPP. Yes. And um, man, she, she just sees incredibly brilliant. If, uh, if you'd like for her to be on your team, you know, you're welcome to join us. Or if you have a question about a 10 99 person, say, how do I do this? Right? We're also available to come talk to us if you wanted to use us. Great. But if you want to, if you say, hey, I know a Joe Guy over here, I'd like to turn this guy into a w two employee, but I'd like to use him. That's great too. Uh, we just want to feed you good information and be a support system and uh, Aquilla thank you so much for helping us out today, our very first podcast. Hopefully it's a huge success and it'll be like an honor to say, I don't know about that though, but you never know.
Speaker 4:
32:21
Well, you are our first guest and we were very, it was unanimous. We said that Aquilla has to be our first guests, so thank you so much.
Speaker 1:
32:30
Well, thank you guys for having me. I really, I feel honored and I was more than glad to do it for you. Anything we can do to keep people compliant out there, I'm for it.
Speaker 2:
32:42
Amen. And equilla have a great vacation.
Speaker 1:
32:45
Thank you so much.
Speaker 2:
32:46
All right. We'll talk to you soon. Thank you everybody so much for watching. If you enjoyed this video, please like follow, subscribe, whatever platform it's on. We're going to have it on a bunch. We really appreciate it. We look forward to providing more great material with you in the future and remember the better at business with team Eagle. Cool.