Sub Contractor Pay Question

[Koya]

A lot of people agree to a subcontract relationship in order to help the contractor avoid the cost and headache of establishing an employer/employee relationship and it's essentially a condition of the working agreement, but they have the habit of thinking like employees when they aren't.

If this were an employee relationship, it would be governed by labor law and you would have to be paid. A subcontractor is a business relationship with contractual obligations (whether written or handshake) and whether you should be paid depends on the understanding between the two of you and whether you should ask to be paid also depends on how important the business relationship is to you. Businesses with ongoing relationships do sometimes renegotiate deliverables and payment for a deliverables, ask for discounts, ask for clawbacks, ask for add-ons,and so on, when they feel the circumstances require it. As a subcontractor, you're also a business, and it's a business decision to accommodate or deny the request. The consequences of accommodating or denying the request will impact the business relationship and you have to make that call.

When I was working "for" my mentor, I never got paid until he got paid. That set the tone that we were more partners doing a fee split, rather than employer/employee. Another supporting factor was that it was always my choice if and when I worked and which assignments I took. A couple of times, we did get stiffed and he offered to pay me anyway, but I refused and told him we were in it together, although he did find occasional reasons to up my share of the split.

 

[Adios]

A lot of people agree to a subcontract relationship in order to help the contractor avoid the cost and headache of establishing an employer/employee relationship and it's essentially a condition of the working agreement, but they have the habit of thinking like employees when they aren't.

If this were an employee relationship, it would be governed by labor law and you would have to be paid. A subcontractor is a business relationship with contractual obligations (whether written or handshake) and whether you should be paid depends on the understanding between the two of you and whether you should insist on being paid also depends on how important the business relationship is to you. Businesses with ongoing relationships do sometimes renegotiate deliverables and payment for a deliverables, ask for discounts, ask for clawbacks, ask for add-ons, and so on, when they feel the circumstances require it. As a subcontractor, you're also a business, and it's a business decision to accommodate or deny the request. The consequences of accommodating or denying the request will impact the business relationship and you have to make that call.

When I was working "for" my mentor, I never got paid until he got paid. That set the tone that we were more partners doing a fee split, rather than employer/employee. Another supporting factor was that it was always my choice if and when I worked and which assignments I took. A couple of times, we did get stiffed and he offered to pay me anyway, but I refused and told him we were in it together, although he did find occasional reasons to up my share of the split.

The legal aspect is but one piece of it. The IRS has very strict rules. Regardless of your contractural relationship the IRS wins. I know a few folks who were hit with six figures in back taxes and destroyed their business. I cannot imagine a CPA advising a business owner to engage an IC. An IC is someone who shows up to do a single task a single time and has other customers.

 

[Koya]

The legal aspect is but one piece of it. The IRS has very strict rules. Regardless of your contractural relationship the IRS wins. I know a few folks who were hit with six figures in back taxes and destroyed their business. I cannot imagine a CPA advising a business owner to engage an IC. An IC is someone who shows up to do a single task a single time and has other customers.

This is true. People who establish a subcontract relationship aren't always aware of the tax pitfalls either. The IRS will impose back tax penalties for those situations they deem to exist only to contravene payroll taxes and income tax withholding. However, while single-time/single-task is usually a clear subcontract, there are situations that you can have an indefinite relationship, but still be a subcontractor, but the hurdle of proof does become harder. The following link has more details on what the IRS looks at:

https://www.irs.gov/pub/irs-utl/x-26-07.pdf

The 20 factors identified by the IRS are as follows:
1. Instructions: If the person for whom the services are performed has the right to
require compliance with instructions, this indicates employee status.
2. Training: Worker training (e.g., by requiring attendance at training sessions)
indicates that the person for whom services are performed wants the services
performed in a particular manner (which indicates employee status).
3. Integration: Integration of the worker’s services into the business operations of the
person for whom services are performed is an indication of employee status.
4. Services rendered personally: If the services are required to be performed
personally, this is an indication that the person for whom services are performed is
interested in the methods used to accomplish the work (which indicates employee
status).
5. Hiring, supervision, and paying assistants: If the person for whom services are
performed hires, supervises or pays assistants, this generally indicates employee
status. However, if the worker hires and supervises others under a contract pursuant to
which the worker agrees to provide material and labor and is only responsible for the
result, this indicates independent contractor status.
6. Continuing relationship: A continuing relationship between the worker and the
person for whom the services are performed indicates employee status.
7. Set hours of work: The establishment of set hours for the worker indicates employee
status.
8. Full time required: If the worker must devote substantially full time to the business
of the person for whom services are performed, this indicates employee status. An
independent contractor is free to work when and for whom he or she chooses.
9. Doing work on employer’s premises: If the work is performed on the premises of
the person for whom the services are performed, this indicates employee status,
especially if the work could be done elsewhere.
10. Order or sequence test: If a worker must perform services in the order or sequence
set by the person for whom services are performed, that shows the worker is not free
to follow his or her own pattern of work, and indicates employee status.
11. Oral or written reports: A requirement that the worker submit regular reports
indicates employee status.
12. Payment by the hour, week, or month: Payment by the hour, week, or month
generally points to employment status; payment by the job or a commission indicates
independent contractor status.
13. Payment of business and/or traveling expenses. If the person for whom the
services are performed pays expenses, this indicates employee status. An employer, to
control expenses, generally retains the right to direct the worker.
14. Furnishing tools and materials: The provision of significant tools and materials to
the worker indicates employee status.
15. Significant investment: Investment in facilities used by the worker indicates
independent contractor status.
16. Realization of profit or loss: A worker who can realize a profit or suffer a loss as a
result of the services (in addition to profit or loss ordinarily realized by employees) is
generally an independent contractor.
17. Working for more than one firm at a time: If a worker performs more than de
minimis services for multiple firms at the same time, that generally indicates
independent contractor status.
18. Making service available to the general public: If a worker makes his or her
services available to the public on a regular and consistent basis, that indicates
independent contractor status.
19. Right to discharge: The right to discharge a worker is a factor indicating that the
worker is an employee.
20. Right to terminate: If a worker has the right to terminate the relationship with the
person for whom services are performed at any time he or she wishes without
incurring liability, that indicates employee status.

 

[Howard Klahr]

I know a few folks who were hit with six figures in back taxes and destroyed their business.

Not because they operated as an contractor and independent contractor but rather because they didn't. There is more to falling under a particular status or category than just "choosing" one.

I cannot imagine a CPA advising a business owner to engage an IC.

Then you do not know a CPA that is skilled in advising their clients. Clearly the world does not fall into a single category to function in just one manner.

An IC is someone who shows up to do a single task a single time and has other customers.

This is patently untrue. Even the government maintains independent contractors rather than employees, even involving in on-going processes.

 

[glenn walker]

Since we are only talking about a few appraisals and a 15 year relationship I would probably eat the two or three appraisals " as far as " a claw back -NO I have had many independent contractors over the years in another business we owned but the sub-contractors had agreements with me not who I contracted with and there payment was not contingent upon if I was paid or not.

1- You don't owe any money back.
2- In my opinion there is no legal basis for a claw-back.
3- Eat the two appraisals and rework the relationship.
4- End the relationship but if you don't have a client base you may end up in bankruptcy in 6 months :
5- Attorney cost would be more than a appraisals.
6- The DA ( That Poster watched too much Judge Judy )

** ANGRY-CATS ( forgotten man ) Recommends #1-2-3

 

[Adios]

Not because they operated as an contractor and independent contractor but rather because they didn't. There is more to falling under a particular status or category than just "choosing" one.

Then you do not know a CPA that is skilled in advising their clients. Clearly the world does not fall into a single category to function in just one manner.

This is patently untrue. Even the government maintains independent contractors rather than employees, even involving in on-going processes.

You are correct. I oversimplified it. Let me rephrase...I cannot imagine that with the IRS definition in hand a CPA would advise a supervisor to engage a trainee as an IC. Many years ago I was audited by the Department of Labor, not the IRS. They wanted me to pay Workers Comp on a part time bookkeeper and a computer repair guy. I beat it but it cost me a lot to argue it. The test at the time was whether or not they had business cards and a yellow pages ad.