GC has WC policy, but some “subs” that are sole props or even who come in pairs or triplets, even, are paid hourly, not on regular payroll with deductions, etc., but given the gross amounts weekly in checks. They are 1099’d at year end.
I know that by all definitions they are employees, but what risk is run paying them this way?
Replies
It's illegal in California.
And I just picked this up from a website I googled to by querying "1099 versus payroll"
"The payroll tax payments can quickly get a business into serious trouble with the IRS, so most small businesses hope to cut their tax burdens by trying to make almost everyone a contractor. Unfortunately, the IRS has a very difficult list of 20 points which they use to determine whether or not it should reclassify contractors as employees and hit you for the back taxes (plus heavy penalties and interest, compounded daily)."
Sounds risky to me!
Well... start with the IRS charging you penalties for misclassifying your employees, late charges and interest on payroll taxes you didn't pay, and then all of the back payroll taxes too. Then the worker's comp people can come after you for the premiums you didn't pay, with penalties and interest tacked on. Are you in a state with income tax?
Basically, they rip you a new one.
Bob,
Ask Jerrald Hayes about this. He will probably send you bunch of stuff. If you have any common sense at all most of it will scare you to death.
It is pretty common in this industry and most get away with it but the few who do get caught get slammed. In some cases it's viewed as the employer stealing from the Employee ( all the W/c and unemployment and such).
That doesn't even address what happens if one of them gets hurt. Someone will ultimately be responsable. Most likely the guy who hired them as subs.
Sorry, meant to reply to Bob not Dave
Edited 7/6/2004 1:48 pm ET by brb
There is not much risk as far as WC is concerned. Our WC carrier audits us every year and every year we have to prove that the subcontractors have coverage or that they are exempt as a legitamate sole proprietor or partnership. We end up paying the premiums for any doubtful cases. There is no penalty for this.
There is some risk as far as taxes are concerned. This hinges on whether they are employees or not. If they are really employees, by the IRS definition, and they do not pay the taxes due on the amount in the 1099, you will be liable for them.
Over the past ten years we used a painter and drywall finisher who had his own crew and many jobs other than ours. He did between $10k and $56k worth of business per year over that period of time. He and his crew billed us only for their labor and they charged their materials to our accounts. We submitted 1099's each year and paid the WC premium for all the payments since he did not carry WC for his employees.
It turns out that he was not paying his taxes or at least not all of his taxes because he now is liable for over $60k in back taxes and penalties. That's a lot of money for someone who probably did not net more that $20k per year. We, as the general contractor, had no liability though we did receive a letter from the IRS telling us to send any payments due for past and future work by this painter directly to them. The painter has given up his business and is now an employee for another gc.