In the previous blog, we pointed out that there are definite considerations the self-employed individual will face if they are hiring an employee. For the self-employed business owner with a Solo 401(k) (also marketed as a Uni-K, self-employed 401(k), self-directed 401(k), self-administered 401(k), there are problematic issues related to including the employee in the Solo-K plan. You got it….it is no longer an individual plan, you will have to include the employee in plan (even with a probationary period) and annual plan testing (e.g., having additional fees). Yikes, not fun.
Is retaining the services of an independent contractor an option? Yes, of course. In the previous blog, we addressed this option, but there are issues. Is the person truly a 1099 independent contractor or are they an employee? If you are audited, can the self-employed business owner prove the worker is (and meets the definition) an independent contractor? I think it is fair to say that the business owner does not want to get into a debate on this issue with State agencies and the IRS….fair to say, right?!
In the last blog, we introduced 4 questions (of 20) to help the business owner determine if the worker is an employee or an independent contractor. In these 4 questions, if the business owner answered YES to all 4 questions, there would be a high probability that, under scrutiny, the worker would be considered an independent contractor. The remaining 16 questions (broken up in this and a following blog post) are opposite. IF the business owner answers YES to any of these questions, the worker is most likely an employee. So, let’s proceed with the first 8 of 16 questions (remember, if you answer YES to any of these as the business owner, the worker would probably be considered an employee):
1) Instructions — Do you, as the business owner, provide the worker with instructions on when, where and how they must work? If so, I think all of us would agree that supervisory role would dictate an employer/employee relationship. I true 1099 independent contractor must be able to set their own hours, work location and how they execute their responsibilities.
2) Training — How is the worker trained? Are you providing the worker with specific training? Is the worker already trained in their craft? An independent contractor possesses the skills to execute their work tasks. Therefore, if the self-employed business owner is providing the worker with training related to the business, the worker could be viewed as an employee and not an independent contractor.
3) Critical Aspects of Services Provided? — Are the services provided by this worker so integral and critical to the business, that it would be hard for the business to operate effectively? If a business owner retains the services of a worker and, realistically, the business would not be able to operate without the services provided by this person, this arrangement could be viewed as an employer/employee relationship.
4) Are Services Provided Personally? — Is the worker providing services personally or delegated to others? This could indicate the business owner is interested in the methods employed by the worker, and not just the results.
5) Hiring of Worker’s Assistants? — Does or will the worker hire, supervise and pay their assistants? If a presumed independent contractor has assistants, is the business owner assisting with the hiring, supervising or compensation of these assistants? If so, this would suggest an employer/employee relationship as a true independent contractor must hire, pay, supervise, etc. their workers.
6) Continuing Relationship? — Is there an on-going relationship between the worker and the business owner? A relationship can be considered on-going if services are performed frequently, but irregularly.
7) Worker’s Hours? — As the business owner, do you set the worker’s hours? You know what I am going to say, it would only make sense that if you are dictating the work hours of the independent contractor, that it would be interpreted that the individual is an employee, not a contractor.
8) Full-Time Work Required? — Must the worker spend set times at the the business owner’s place of business? Again, this should be a fairly straight-forward issue. If you, as the business owner, are requiring the worker to spend certain dates and hours at your place of business, you are dictating their schedule. An independent contractor can set when and where they will work.
Depending on your perspective, the good news is that as a business owner retaining the services of a worker and can answer NO to questions 1 – 8, there is probably a good chance that the individual would not be considered an employee. Of course, remember, these are general guidelines. Now, if you can answer the next 8 questions NO, you should be on your way to retaining the services of a worker without them being considered an employee.
As always, the information is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional on all such matters.