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IRS Warning for Business Owners Paying Help by 1099 IC Status

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  • IRS Warning for Business Owners Paying Help by 1099 IC Status

    Most 1099 groomers are really employees...the crackdown is beginning...are you sure your groomers are really IC?

    NASHUA, N.H. – The Internal Revenue Service and 37 states are cracking down on companies that try to trim payroll costs by illegally classifying workers as independent contractors, rather than as full employees, The Associated Press has learned. The practice costs governments billions in lost revenue and can leave workers high and dry when they are hurt at work or are left jobless.

    Many who have studied the problem believe it's worsened during the economic downturn, fueling even more aggressive recovery efforts by states.

    "I think the economic downturn has had a serious impact ... has exacerbated the problem," said Vermont Rep. Warren Kitzmiller, who chaired a panel that recently reported on the issue. "Businesses are looking to trim costs in every way they can, and some are coming very close to shading the legal with the illegal on that question."

    For a growing number of companies, including Target, FedEx Ground and Comcast, cutting costs means removing workers from the payroll or bringing on new workers — sometimes through intermediary companies — without making them full employees.

    The Society for Human Resource Management, representing company personnel departments nationwide, said it surveyed members in October 2008 and found 12 percent of them were moving to use more independent contractors, contingent and temporary workers because of the recession.

    By designating workers as "independent contractors," businesses can save as much as 30 percent of payroll — avoiding unemployment insurance and workers' compensation payments, as well as the employer's share of payroll withholding.

    The practice also deprives states of sorely needed income as rising jobless rates strain their budgets. The nation's unemployment rate in January was 9.7 percent.

    Typically, unless workers fight for and win a ruling that they should have been treated as full employees, they aren't able to collect workers' compensation for the injury or unemployment benefits when left jobless.

    The federal Government Accountability Office estimated that employee misclassification resulted in the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006, the last year for which figures are available.

    The IRS said it would begin a three-year study of the issue this month. State crackdowns include:

    • New York: A multi-agency team reported finding nearly 31,500 cases of employee misclassification and nearly $390 million in unreported wages from Sept. 2007 and the end of 2009. It had ordered employers to pay more than $28 million in past-due wages, taxes and penalties.

    New York's numbers were up significantly. Its team found 12,300 misclassification cases in the 16 months ending in December 2008; by a year later it had found about 19,200 more.

    • California: Orange County prosecutors said last year they would seek $38 million from a couple for workers' compensation fraud for failing to pay premiums and submitting claims for 42 injured but uninsured workers at their construction companies.

    • Florida: A 2008 statewide grand jury found some construction contractors conspired with check-cashing stores to fake payments to a bogus subcontractor, cash the checks themselves and pay workers cash, under the table.

    • Ohio: The state's Bureau of Workers' Compensation ruled last year that a former state attorney general's top aide improperly classified all four employees at his Youngstown construction firm; on appeal only two were found misclassified. The state won't say how much he owes in restitution.

    Matthew Capece, an officer with the United Brotherhood of Carpenters and Joiners of America, called the states' efforts encouraging.

    "We're beginning to see the state and federal government fighting back and taking more interest," Capece said. But, "There's a lot of road left to travel to fix this."

    Companies say using independent contractors helps them keep costs down and stay flexible in an increasingly tough and competitive economy.

    "Some companies desire to focus on core business functions," said Kevin Hishta, an Atlanta-based lawyer who represents employers in labor relations matters. "They may feel they do not have the expertise to handle a particular function or that it would be more efficiently handled by others." He offered as an example "a carpet manufacturer who decides 'I really don't need to be in the installation business.'"

    Experts say independent contractor abuse extends through a broad swath of industries: low-skilled makers of shipping pallets in California, home health providers — even dancers in some Massachusetts strip clubs. Several states said the practice is most prevalent in construction.

    Some brand-name companies have been sued for alleged employee misclassification. FedEx Ground, a subsidiary of Memphis-based FedEx Corp., has been sued more than 45 times for classifying package delivery drivers as independent contractors. The company maintains its drivers are small-business owners, who can own multiple routes and expand their business as they wish. Court rulings have been split.

    FedEx rival UPS is close to settling a California worker misclassification case, said a lawyer in the case.

    Both cable television giant Comcast and Target have been sued for allegedly hiring intermediary companies that deny benefits to workers. Plaintiffs included janitors who worked in Target stores in Texas and cable TV installers in Massachusetts. Both Target and Comcast maintain the workers suing were never employees of theirs.

    U.S. Labor Secretary Hilda Solis said some workers don't always know of their independent classification and perform hazardous work without any health and safety laws protecting them. They often discover their misclassification much later, she said.

    New Hampshire construction worker Celso Mena, 59, a Panama native who became a U.S. citizen last year, fell from scaffolding at a school construction project in 2007 and shattered his ankle. From the hospital, he called the company that had hired him.

    "They told me they weren't responsible for anything because I was their contract worker," Mena said through an interpreter at his home in Nashua.

    In a state Labor Department hearing, the company argued that Mena voluntarily signed papers saying he would work as an independent contractor. Mena, whose English is poor, said he did not understand what he was signing and that it was not translated for him. The company, GMPB-Kal-Vin, and its attorney, Paul Kfoury Jr., did not return telephone calls seeking comment.

    Mena eventually got nearly $50,000 in a state-ordered settlement, but most of that went to medical bills, and he's been unable to work since the accident.
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  • #2
    Could I have permission to cross post this?
    What a caterpillar considers the end of his world, we call a butterfly.


    • #3
      Can this effect "private contractors" legally? This is what I am considered but have never signed anything stating so.


      • #4
        This is happening because people are pushing for licensing not because of the economy. You might as well be waving a flag saying "Hey, check our industry out. You over here charge us more"................ Same with my father in the 80's now he has to pay into social security, unemployment taxes, cont education, yearly lic and so on. And quess what his field still has f- ups and they went to school.


        • #5
          Originally posted by SCGroomer View Post
          This is happening because people are pushing for licensing not because of the economy. You might as well be waving a flag saying "Hey, check our industry out. You over here charge us more"................ Same with my father in the 80's now he has to pay into social security, unemployment taxes, cont education, yearly lic and so on. And quess what his field still has f- ups and they went to school.
          I dont think this has anything to do with licensing. In my opinion it has to do with cheating people out of proper pay and getting away with not paying the taxes they are supposed to on their employees. I am not sure what you are saying about your father, if he is working, he should be paying into social security, unemployment etc. Continuing ed and yearly license has nothing to do with the IRS.
          What does a dog do on it's day off?


          • #6
            For anyone who wants to search the entire list it is publication 1779. You can google "IRS publication 1779" and get the link.

            For a seminar, I met with some business Attorney's and they applied parts from 1779 to the Grooming Employee and I have those if I can post them.


            • #7
              Stephen- If you didn't want these posted, please tell me and I am sorry :-)

              Instructions *
              Employees comply with instructions about when, where, and how work is to be performed.
              Contractors set their own hours and do the job in their own way.

              Training *
              Employees are trained to perform services in a particular way. They are required to take correspondence courses and attend meetings. Other methods also indicate that the employer wants the services performed in a particular way.
              Contractors use their own methods and receive no training from the purchaser of their services.
              ~~~ This means that a contractor may use a heated kennel even if the salon does not allow.

              Integration of an employee are merged into the business.
              Success and continuation of the business depends upon these services done by an employee.
              The success and continuation of the business aren’t dependent on services provided by a contractor. Contractors do not perform services that are main source of income.
              ~~~ A Veterinarian can easily have a Groomer as an IC, since their main source of income is Veterinarian Medicine not grooming.

              Right to Fire *
              An employee can be discharged at any time.
              Contractors cannot be fired so long as product results meet contract specifications.
              ~~~ These specifications must be outlined in a contract.

              Services Rendered Personally *
              Services must be rendered personally. An employee does not engage other people to do the work.
              Contractors are able to assign their own workers to do the job.
              ~~~ Contractor can send their husband into groom even if he is not trained.

              Continuing Relationship *
              An employee continues to work for the same person year after year.
              Contractors are hired to do one job. There is no continuous relationship.

              Set Hours of Work *
              An employee’s hours and days are set by the employer.
              Contractors are masters of their own time.

              Making Services Available to the General Public *
              An employee does not make services available to the general public.
              Contractors have their own offices and assistants. They hold business licenses, are listed in business directories, maintain business telephones, and otherwise generally make their services available to the public.

              Full Time Required *
              An employee normally works full time for an employer.
              Contractors are free to work when and for whom they choose.

              Doing Work on Employer’s Premises *
              Employees work on the premises of an employer; or on a route, or at a site, designated by the employer.
              Contractors work off an employer’s premises and use their own offices, desks, and telephones.
              ~~~ This includes their own grooming table

              Order or Sequence Set *
              An employee performs services in the order or sequence set by the employer. Salespersons report to the office at specified times, follow-up on leads, and perform certain tasks at certain times. *
              Services are performed at a contractors own pace.
              ~~~ A contractor may send a dog home unfinished to return on another day because they want to go home early.

              Furnishing of Tools, Materials *
              An employer furnishes tools, materials, etc.
              Contractors furnish their own tools, etc.


              • #8
                You laid it all out there! Great post! There should be no questions on that one! It is cut and dry between the differences between an IC and an employee!

                Thanks for posting!

                BTW this is going on with many business' such as landscaping, and construction I see it all the time! And when it comes to someone getting hurt who pays! People should really think abou that!


                • #9
                  Yes, I know a lot of vet clinics or groom shops that claim their groomers are ICs, when they are actually employees. I'm in the process of getting some tax stuff sorted out from when I was an IC. The thing is... I wasn't really an IC, I had set days I had to work, I had certain rules I had to follow etc etc. I've been talking to an attorney to see what my options are. There are a lot of people in the pet industry who are paying groomers as ICs to save money. I hope something is done to help groomers out. Groomers need the benefits the come from having an employer.


                  • #10
                    Thanks for posting the differences between IC's and employees, my taxes are done as IC and the description fits it well.

                    I send very aggressive dogs home because no one(besides me) pays for my medical bills or theirs when they decide to try and eat me! So luckily I haven't been hurt!


                    • #11
                      I fell into the same situation in the last couple years and have a good friend who is in for over ten thousand in taxes due to the same. She is scared to say anything or stand up for herself because of the threat of being fired. She even opens and closes that shop! I am disgusted by what these owners are getting away with! I understand though, I did the same thing, needed to keep a paycheck coming in, not thinking of the repercusions. I am so glad the government is finally listening, that is not to say, that I don't believe that the government created this mess in making it so hard for the small businessmen and women out there!!! That does not give the business guys, however small, the right to screw their "EMPLOYEES" out of social security and medicare and a whole heck of a lot of taxes from them. Wake up Americans, it's time to stop letting our government and our bosses take our hard earned dollars.... God Bless the America I was raised to belive in and my hopes and prayers that it will return!


                      • #12
                        IT IS ABOUT TIME!!! Employers are taking advantage of their employees all so they can save a little bit of money. The rules concerning IC are very clear. Three years ago I looked into it and could understand the differences.

                        Employers should NOT be able to get away with mistreating their employees.
                        "The most affectionate creature in the world is a wet dog." -Ambrose Bierce


                        • #13
                          Keyrey, I totally agree. After doing my own research I realized that as an Employee my employees would have an easier chance to get a loan, the money I pain in taxes was less than they would have to pay if they were IC.

                          Here is the issue I raise though- As an EMPLOYER whose money/profits rely solely on grooming it is impossible to make a profit paying 55,60 and 65%.

                          Employees need to understand for us to help them be more credit-worthy, meet taxes and make a profit then the average commission will have to go down.

                          I personally pay my employers on a sliding scale- do $$ in a week and you earn %, do more than $$ and you earn more %.
                          ~ I figured that the more I make then the more they should make.


                          • #14
                            I understand where you are coming from Gracey Rose. I get paid 50%, haven't heard of any employers paying more than that unless they are bathing their dog's too, then 60%. I think it should also depend on what each groomer is bringing to the table. I like your idea of bringing up the percent based on performance. It is frustrating as an experienced groomer who get's all the difficult cuts because they are the best at them and the less experienced or a groomer that is not as good at the difficult cuts is given mostly shave downs earning the same amount and often times more...


                            • #15
                              Vested Interest

                              I agree Gracey. When people have some kind of vested interest or a co-op style agreement based on performance it usually results in happier more productive employees. We all need to feel we have some kind of security re: our jobs, health, and family life.

                              That said though I can also understand people trying to be as frugal as possible. Big corps. have gotten away with outsourcing our jobs and livelihoods for years and in most cases with the govt's blessing. Our whole western society has become a race for the bottom (survival).

                              Government don't help small business owners either with the mountains of time-consuming paper-work and constantly changing rules, acts, laws etc. Many laws have been around for a long time and are not evenly enforced across the board or all the time like they should have been. They are now desperate for funds so they will audit businesses and search out the "evil" ones. They will then get fines and some may be forced to close etc. This problem of ic's has been allowed to go on for so long it has become acceptable behavior and employees are just to afraid to say anything. This the governments fault and now it is blowing up in their face. Unfortunately many (innocent?) people will also end up feeling the reprisals.