employee vs independent contractor

[winnie]

I have a flooring company that sells/installs flooring. There are no retail sales, only contracts for installations. This S corporation has started using sales people this year that they have been treating as contractors. I thought, initially, that maybe they were statutory employees, but have determined (with your help) that they are not.

But we still have some issues on whether they would be independent contractors or employees. My client very much wants to structure this so they are independent contractors. She (100% owner) is also very bright. Instead of just taking the information that I have given her, she is smart enough to have done a lot of her own reading about the issue. She wants to complete SS-8 - which is an IRS form to determine worker status. I have never filed one and seems to me like it is a request for audit on the issue. However, it would be definitive!

These sales agents will fall into the grey area where we all hate to be. They sell primarily for this company and use company flooring sample books. They work both in the company's office and their own home office and the customer's place of business. On the other hand, they are all LLC's, bill the company, are only paid on commission, and are able to sell for other companies - although they don't often. They have their own customers that they bring to the table (if my client has the contact - she makes the sale), they set their own hours and frequency of customer contacts. There is no specific region they cover, just their customers. My client feels that they are motivated by their desire to make money. It is up to them to determine how hard they work or don't and since they aren't eating up her payroll, she wants it that way.

I know that is more info than most of you want, but I think it makes your understanding of my situation a little more complete. At the end of this long story, have any of you had experience with Form SS-8? Would we be asking for an audit? With the IRS bias toward employees, would they really consider the situation or just automatically say employee?

Thanks,
Winnie in NC

[Luis Mopeo]

I don't believe filing the SS-8 will be an audit trigger. It seems to me it would be more of a sign of the client going out of her way to comply.

One item you mentioned was LLCs. Are the individuals required to do the selling? If your client contracts with the LLC, but only the designated individual can sell, that would lean toward employee.

[winnie]

individual

My client doesn't really care or dictate who sells - as long as they sell. Nothing specifies a specific individual must do the selling. However, the reality is that 1 person is completing the sales at each LLC.

[taxmandan]

Ss-8

I've only used the form to prove employee status, after the fact, when the client clearly did not meet the IC standards. So I can't say that it would be an audit trigger or not by asking for a determination up front. But the determination that the IRS makes could well not be the one you seek and that is the risk. Be mindful of the things that the IRS considers when making a determination, form your answers on the form accordingly.

I would document everything that you believe shows the sales reps to meet the criteria of an IC and not that of employee. Then wait and see if/when the IRS ever questions the status.

And very important to know how your state determines status, our state has much stricter laws than the IRS for being an IC so that threshold rules, not the IRC.

[winnie]

State?

What state are you in?

[taxmandan]

Oregon

Our laws on IC/Employee status require the worker to meet ALL criteria to be an IC, otherwise they are employees. That means: do the work for multiple businesses, have a financial risk, advertise and hold themselves out for doing work for others, place of business of their own, even if it's a home office or shop, etc. etc. The state employment office has been hammering many small businesses who thought that complying with the federal standards was sufficient. There was some change from the legislature this last year, but still stricter than federal standards.

[abby]

state unemployment and workers comp

I, too, have run across this in Oregon - just wanted to add that there are occasions when I've seen an audit require a company to cover certain folks for unemployment and/or workers comp - as determined in a SUI or WC audit, but that didn't trigger a determination that they need file as employees for federal or even state income tax purposes.

I may be wrong in missing a rule that requires consistency, but I can report that in practice - as long as they include these persons in their unemployment and/or workers comp filings, they would (could?) continue to treat them as contractors for income tax purposes.

[taxmandan]

True, federal status and state could be different, but

what is the point of maintaining IC status if you're paying the payroll taxes anyway? True, the business doesn't have to pay half of FICA but Workers' Comp insurance and Unemployment taxes are a big chunk of the employer taxes. And I'd wonder if any insurance company will write a policy for WC on Independent Contractors? Have never seen that.

The two most recent Employment audits I saw, the Dept of Revenue concurred with Employment Dept on the status and required withholding for income taxes as employees. And treating someone as an IC for federal and employee for state would be a BIG PITA and require high fees for me to handle that for a client. In fact, I can't imagine agreeing to do that. 1099MISC for the feds and W-2 for Oregon, ugh!

[abby]

agreed

I absolutely agree it would be best to be consistent in most cases - although there are a handful I can think of where I've seen it done - for example - a local professional theatre pays it's non-union contracts as IC, but pays workers comp on the actors. Temporary contracts, especially, can be and are added to a workers comp policy.

I don't mean to stray to far off the original questions, since it dealt with a more permanent arrangement but did just wanted to put out there that circumstances might allow such a split.