An employee is anyone who completes a service that the employer directly controls two key elements, what is completed and how the work is completed. Colby is a fishing guide. Colby’s boss is Jake. Jake owns The Fishing Adventures LLC. Jake directs Colby to take clients on daily guided fishing adventures down the snake river. Colby is instructed when and where to meet the clients, and what time the fishing adventure ends. Colby does not find new fishing clients nor does he market his fishing guide services. Colby works directly for Jake who drums up new fishing clients, directs Colby on where to begin and end the fishing adventure. When Colby receives tips from clients Jake processes those tips on Colby’s bi-monthly paycheck. In the off season, Colby works around the store and helps get out the annual company catalog. Jake also provides Colby with health insurance and a 401k match program. Colby is an employee of The Fishing Adventures LLC.
Where is the water muddy?
Colby is a seasonal employee of Jakes. Colby owns his own fishing tackle, gear, and boat. Colby fishes many rivers in Wyoming and Idaho and determines which river is best to fish. Colby has a contract with Jake’s company along with three other local fishing adventure companies in the area. Jake does supply Colby with daily fishing clients but does not direct Colby on what river to fish nor how to fish that river with the clients. Colby does not have a contract with the client to fish. Jake, the owner has the fishing contract and contracts with Colby to execute the fishing adventure. Is Colby independent or does his income solely rest on Jake providing him with daily fishing adventures? If Colby has contracts with several local fishing outfitters and he chooses which one to work for and on which day, then Colby would be an independent contractor. However, if Colby is contracted only with Jake’s company he may be seen as an employee.
Determining if an individual performing services for your business qualify as an employee or an independent contractor depends on how you control what work is completed and how you control the actual work to be completed.
Common Law Employee
Earlier we reviewed what an employee was. Under common-law rules, an employer has an employment relationship when the employer controls how the work will be done and what work will be done. Colby has free reign to put his fishing boat into the river where he deems best and to help the clients catch the best fish possible based upon his opinion and free reign. Great, so in order determine if Colby is an independent contractor or an employee you must first dig in and examine the business structure. The area between employee and an independent contractor can sometimes be gray that is why you must know what is at stake. Ask yourself, what degree of independence and control do you give to the individual performing work for your business?
What is at stake?
Taxes. Taxes. Taxes. That is what is at stake. Let’s look at Colby who is an employee. His boss Jake will need to pay the employer’s share of FICA on all earnings. FICA is 7.65% and is made up of Social Security (6.2%) and Medicare (1.45%). If Colby earns $50,000 a year, his employer Jake is responsible for an additional $3,825 in FICA payroll taxes. If Colby is classified as an independent contractor then Colby is responsible for his own taxes which results in Jake keeping that $3,825.
Remember the Federal government funds its day-to-day operations from payroll taxes. When the Feds wait for their money until Colby pays his taxes in April of the following year they are losing billions of dollars in daily operating cash flow. We have all heard the big court cases with technology companies classifying their workers as contractors and the fight that follows with the Federal government. It is all about cash flow for the business and cash flow for the Federal government.
Here at the Professional Pay Group, we escrow your payroll taxes so that the funds are immediately available when your quarterly payroll taxes are due. Don’t spend your payroll withholdings or the Feds will be after you. Interested in our payroll services or have compensation related questions? Reach out to us anytime using the form below.
In our employee and employee common law sections above, we reviewed how an employee performs services for their boss (employer) and how they are legally an employee. How are they defined as an employee? Because the employee is told what job is to be done and how the job is to be completed.
Colby was a fishing guide and worked for Jake’s company The Fishing Adventures LLC. Jake owned the boat, controlled who Colby took out fishing, told him which river to fish, and what time to start and stop the fishing adventure. Jake had complete control of each fishing adventure and Colby was the employee who had free reign while out on the river but all other aspects of the fishing adventure were controlled by his boss Jake.
In this post, we will look at what could make Colby an independent contractor. I use the word “could make” on purpose, because each business must reflect on control and independence. Let’s dive in!
Colby is an independent contractor. He owns his boat and his fishing gear. Colby works when he wishes and contracts his personal fishing guide services to several local fishing guide outfitters. One of these outfitters is Jake’s company The Fishing Adventures LLC. Colby is an expert fisherman, not a marketer. He relies on his expertise as a local fisherman and his personal relationships with several outfitters to bring him daily fishing guide clients. Colby tells Jake a week in advance which days he is available to guide clients for The Fishing Adventures LLC. Colby also relays to Jake which days he is working other jobs. By other jobs, Colby means that he is already scheduled to do fishing guide services for other local outfitters. Jake reviews his calendar to check which clients are coming in next and Jake then contracts with Colby to take a group out for a 2-day fishing adventure next Thursday and Friday. Colby checks his schedule, negotiates a final price with Jake to render the adventure services, and then contacts the clients to arrange the fishing trip details.
Colby is in complete control of who he works for when he works, and which river to fish. Colby continues to check the fishing reports from the DNR (Department of Natural Resources) and then decides to take these clients down the Snake River in Wyoming due to the number of Rainbow trout being caught. He coordinates with the client what time they would like to start and tells them where to meet him on that Thursday morning. Colby is in complete control and is independent. Colby is an independent contractor.