Welcome to episode 117 of the Own Your Genius podcast. Hiring help in your business is a huge milestone for many entrepreneurs. Many business owners step their toe into the hiring pool by starting with virtual assistants under the assumption that they be independent contractors rather than employees. But what happens when the assumption is wrong?
Listen and learn as Attorney Murray discusses the differences between an independent contractor and employee. Today’s episode could save you thousands of dollars in legal fees and tax fines.
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Resources and links mentioned in this episode:
About the Own Your Genius Podcast
The Own Your Genius podcast is the perfect mix of business, law, and mindset to help black entrepreneurs succeed in business and life.
Join Attorney LaConya Murray each month as she and guest share their entrepreneurial journey, tricks of the trade, and their secrets to getting out of their own way to succeed.
Inspired by her grandmother, the community bootlegger Attorney Murray‘s passion for helping entrepreneurs started early. Today she helps entrepreneurs throughout the country protect their brand, content, and ideas through trademarks, copyrights, and business development.
Until next week, keep building your business, growing your brand, and owning your genius!
Hey, geniuses, welcome to episode 117 of the Own Your Genius podcast. We’re just going to kind of jump right into today’s episode because I’ve seen this happen way too many times and I just want to speak about it. You can’t contract your way into having an independent contractor.
Now, just because you use an independent contractor agreement or something like that, doesn’t mean that you necessarily have an independent contractor agreement. And that’s what today’s episode is about. If you are getting ready to hire someone or maybe you’re already working with a team member, keep listening if you want to make sure that you have that person classified the right way and to learn the consequences of misclassification.
Okay, so like I said, just because you use an independent contract agreement or any other contract with language that has something like, that they pay their own taxes or they’re not an employee or that you don’t offer benefits doesn’t make that person that you hire a contractor. Especially, especially if you counter that language with something with a work schedule that they have to adhere to or that the work they’re doing for you. It’s exclusive and they can’t do that work for anyone else, or you’re telling them how to come to work, you know, a certain type of uniform they present themselves, you may not have an independent contract.
The law is clear. Well, as clear as the law can be because we know it’s the law. But the law is pretty clear on who classifies as an independent contractor and who gets classified as an employee. And I get it. For a lot of small business owners, the thought of hiring help is intimidating. Being responsible for someone else’s livelihood is not a joke. I absolutely get that. I’ve done that, been there. And being responsible for taxes on top of making sure that other people are paid. It’s enough to make some people just want to remain a party of one. I’m just going to put on my Superman cape, Superwoman cape, and just keep doing all of the things because who has the time to be worried about that and who has the money to pay these extra taxes on top of the salary? When you get ready to hire someone, let’s say your budget for hiring someone is $3,000 a month.
And so you say, hey, I’m going to pay you a salary that equals to $3,000 a month. Well, on top of that, you have to pay the additional, you know, 400, $500 in taxes. Can I just add this in here for anyone who’s thinking about hiring, you’re like, oh my gosh, I don’t know if this is the right time. I don’t know if this is the right hire, you know, whatever it is. One of the rules of thumb when it comes to hiring is like, technically, anybody you hire should be able to pay for themselves. At least two times over.
And that doesn’t necessarily look like that they’re actually bringing in leads or selling products. It could be that they’re freeing up time so that you can go and close more leads and sell more products. Because if you have someone that’s doing, you know, maybe social media or whatever, and now you’re not spending that 20 hours a week doing that, that’s 20 hours a week that you can spend doing things like closing sales and talking to people and getting that revenue that covers two times the salary, then that’s the right hire. That was kind of like a side note. Because if you’re able to hire someone that’s paying for themselves, then hiring really shouldn’t be as scary as it is for some people. I don’t know, I just think the thought of hiring an employee is intimidating because we have this negative association with the word taxes. And we try to avoid taxes at all costs.
I really do think that it is a mindset issue. You know, I don’t want to pay taxes. And so we do all these things to avoid paying taxes. Even things like not reporting our full revenue because quote unquote, we don’t want to pay taxes. Well, I’ll look at it in a different way. One, I’m going to make sure I have an accountant that’s gonna make sure that I’m getting all of the benefits and deductions that I can, right? Based off my true revenue.
And if at the end of that, I do have to pay taxes, then that’s because I’ve actually made some money. And that’s a good thing, right? Like making money is what we’re here for. So I don’t want to cheat myself by saying, oh, I didn’t make any money. I wouldn’t be like, oh yes, I made this money. Anyway, like I said, I think it’s a mindset thing that we just have to work around and just know that taxes, that’s part of the cost of doing business.
So don’t try to avoid hiring an employee because you don’t want to pay the taxes on that employee, especially if an employee is what you really need. So if you’re hiring an independent contractor knowing you need an employee, you’re going to end up in more trouble. We’ll talk about that later. So people will try to avoid paying taxes even if the cost of doing that is misclassification of people that they work for. Even the cost of avoiding taxes or avoid paying taxes is misclassifying the people that work for them. They want to hire an independent contractor and they want to control when they work and how they work and where they work, right? They want the time that the contractor works for them. They want the type of work that they do for them to be exclusive.
And a lot of times the work they’re doing is something that’s vital to the business. They want to do all of that. They want to have all that control, right? But they don’t want to pay the taxes. They want to avoid the taxes. They want to avoid providing the benefits that you would normally give to an employee. And they want to avoid nurturing them long term.
When it comes to classification, the IRS is looking for three things. They’re looking for control, they’re looking at finances, and they’re looking at relationships. How much control do you actually have over the person that you’re hiring?
And those are things like…
It’s not necessarily just to control over the person you’re hiring, but how much control do you have over how the work is done? Are you providing instructions on how you want things done? Are you providing training so they can learn how to do it? Are there systems in place that measure their work? These are the type of things you do with an employee.
If you are measuring how the work is complete, if you’re providing instructions and training, and this is not just, because I know like, so you have a virtual assistant that answers the phone, and so you’re saying, hey, this is how we answer the phone, right? Maybe something not like that but more in depth, then you could have an employee, not a contractor.
I also want to look at the finances. When it comes to independent contractors, most contractors, they’re going to have their own equipment.
But don’t be like, okay, good, I have someone that I’m working with and I’m not providing equipment. That’s not the only test because, let me just be frank with you, you have a lot of people that have employees that should be issuing their employees equipment but they’re making them use their own devices. That’s a whole other something subject for another time. So just because you’re not providing equipment does not necessarily mean that you have an independent contractor.
They’re also going to look at things like when it comes to money and finance, they’re going to look at how much money are you spending to train that hire? So before we talked about control, how providing instructions and training could be an indicator that you have an employee, not independent contractor. But like I said, then it depends on the level of training that you’re providing. So one of the things you want to look at is like, how much money did you invest to hire this person? Because most times, you’re not going to send your contractor to a CLE, continue learning education. You’re not going to send them to conferences and workshops that’s going to help improve their skills because as a contractor, that’s something that they should be doing on their own. And if you are doing that, then you might want to say, hey, maybe, maybe I have an employee, not a contractor. A lot of times people won’t.
The benefit of having an employee, they want to be able to control them. They want that person to be loyal to their business and care about their business and be invested in their business. But they don’t want to be invested in that contractor and nurturing and building that relationship.
When it comes to finances, they’re also going to look at how are you paying them? Because most contractors are paid by the job. They’re not paid by the hour. They’re paid by the job. Are you paying them weekly or bi-weekly like you would employee? Or are you paying them at the end of every job? I don’t know. Look at it. This is an opportunity for you to take inventory of how you are handling the people that work with you. And I feel like it’s really important subject because we are talking about doing a lot of hires and people are building teams and things, and people are building teams and hiring people and they’re misclassifying them. And when you do that, you run the risk of end up having to pay more money. I told you before, they’re going to look at how much control you have over the person, they’re going to look at how much money you’re spending on the person, you’re investing on the person, not necessarily on their salary, but like overall, the overall money that you’re paying to have this person work with you. Then I also want to look at the relationship. So this is where a lot of people have this in the contract where they’re defining the relationship and they will say, hey, you are an independent contractor, you won’t have any benefits, you’re paying your own taxes.
But it takes more than that to have an independent contractor. You actually, it takes everything that we talked about before. And just having that one clause in an agreement does not necessarily mean that you automatically have an independent contractor. So one of the things you’re going to look at is this relationship isn’t indefinite or is it until the job is complete. And one important aspect they look at when they become, when they’re looking at independent contractor versus employee as it relates to relationship how vital the work that that person is doing is to the business. How vital, so for instance, if you own a transportation company.
A good one. When I said transportation company made me think of FedEx and the trouble that they got into a few years ago when they missed class spot all the drivers as independent contractors. But FedEx is a transportation company. They’re in the business of driving things and delivering things to and from. Having these drivers show up and equipment that’s provided by the company and when they, you know, telling them when they show up and they’re doing something that’s vital to the business. If there are no drivers, there is no FedEx.
You see what I’m saying? So is the work that person doing vital to the business? That’s one of the things they’re going to look at when it comes to the relationship. And I keep saying this over and over again, and you guys can tell me in the comments if I’m wrong, but I feel like the reason, the number one reason people use contractors instead of employees are not even using it, they classify them, they want to classify them as contractors versus employees is because they’re trying to save money because having an employee is expensive.
But, you know what is also expensive?
Classifying employees as contractors. Listen, that can cost you thousands and thousands of dollars in fines and back taxes and legal fees if the people that you’re misclassifying as contractors decide to get together and sue you for backed you know the taxes they’ve had to pay or the benefits that they shouldn’t they should have received and things of that nature. So you’re trying to save money when it can actually end up costing you money.
When we talk about taxes, if you’re found to have an employee versus a contractor, you’re going to be responsible for federal and state taxes for failure to pay payroll taxes. You’re going to have fines from the Department of Labor. And if you have contractors versus employees that have been misclassified, then that means you didn’t fill out the proper paperwork for those people. So now you’re going to have your I-9s that you’re supposed to have to verify the identity and employment of the people. So when you don’t file those, those are additional fines.
Then, so now you have federal taxes, you have state taxes, you have Department of Labor fines. How about the wage violations? Because sometimes, ooh, baby, let me tell you, sometimes you have these contractors, right? And they’re doing all this work for you. But if you go and break it down by the hour, a lot of y’all are not paying minimum wage. Hmm. Right? You’re not even paying minimum wage.
So now you’re violating wage violations and you’re not taking out work when it’s comp and things of that nature.
So when it comes to making sure you are hiring the right class among the people in the right way, you really want to be careful. You really want to make sure and take real inventory of what you want to be done. So.
I don’t know, I just… I just feel like… there’s a disconnect, especially when your lawyer is telling you one thing that, hey, you need to look at X, Y, and Z, and then you are going to another expert, you are going to your accountant and they’re saying, hey, you can discuss, it’s going to be cheaper for you. You won’t have to pay as many taxes if you have them classified as independent contractor without actually considering the law behind it. So that’s why it’s really important for you to work with both. You need to have both an accountant and an attorney on your team to make sure that you’re doing things not just going to give you the best tax benefit, but also from a legal standpoint. Another thing, a risk that you take when you’re misclassifying people as independent contractors is the intellectual property. And we talked about this in previous episodes that when it comes to work for hire.
Other than those exceptions that really don’t apply to most of y’all, the only real exception is that the person that’s doing the work is doing so in the scope of their employment. That does not include independent contractors. That includes employees only. Independent contractors are not doing the work in the scope of their employment because they are not an employee. They are a contractor. So that’s another thing you need to consider when you’re classifying these people as contractors versus employees.
Now, what does this intellectual property look like? That talks about copyrights, patents, trademarks. It looks like your sales copy, your courses, your inventions, your brand identifiers. These people are helping you create, but they’re helping you create as an employee or as a contractor versus an employee, now we have to ask the additional question of who owns this? Who owns this?
And that’s my, I’m not going to call it a rant, but that’s just something that was really on my mind today as you’re hiring. And we’ve hired contractors, we’ve had employees, and it does, it is more expensive to hire an employee than it is a contractor. But personally, I would rather have an employee that’s going to do the work. And that’s a whole other thing. Not just going to do the work, but that’s going to be, what do I want to say?
I want control. I want to say, hey, you come in from eight to five. I want to say that, hey, this is the work that you’re supposed to do, and this is how it’s supposed to be done. I want to be able to say that, hey, you’re not reaching the goals that we set. You’re not following the system and process to make us look good because when you have an employee, I feel like employees are better when you’re building a brand to keep things on brand. That way you can have everything run the same way.
I will say on the flip side, the benefit of having a contractor is that you’re paying for work that’s done versus an employee. If an employee comes in from 8 to 5 and they only have work, but they’re only working a few hours a day and then they spend the rest of the time surfing the internet, then you as a small business owner who might have limited resources, you’re like, oh my gosh, I am paying this person to surf the internet and I really can’t afford that. So let me just go get a contractor and I say, hey, do these tasks and the tasks are done and I’m paying them for those tasks, which is fine. All I’m saying is, I’m not saying contractor over employee. I’m not saying that one is better than the other. All I am saying, all that I’m advocating, all that I’m really asking you to do is take a step back and be honest with yourself. Are you using this person as a contractor or are you using this person as an employee?
That’s what I have for you. Let me know in the comments what you think of this episode.