Hiring a full time employee/contractor for rehabbing and rental needs

[kkiefer216]

I own a number of rental properties and rehab and sell single family homes.  I am planning on hiring on a full time basis a contractor that has done quite a bit of work for me on both my rentals and rehab projects.  He currently has a full time job that he hates and feels that he needs a steady paycheck to survive on his own.  I plan on offering him a salary position that will allow for him to receive a fixed amount of income for the rehab and maintenance of my properties.  I also want to have our agreement set up so I can subcontract him out for work in the case that I may not have anything for him to do. 

My question is this:  What would be the best way to structure this business relationship?  I have all my properties/businesses in LLC's and would prefer to not incur additional taxes, insurance, etc... associated with having an employee. 

[Gold River]

Hi,

    There are two sides to this equation! First you would like to be seperated from your contractor which means you would like to have an independant contractor agreement with him to work for you! However the bad side of an independant contractor agreement is that you can not mandate when this person appears on your job and you have to give leighway to schedule although your trying to pay him full time!

Now if you tried to contract this person out, he would have to actually work for you, not be an independant contractor as you are not entitled under the law to have him seperate working for you, but together recieving money from someone else! You could be seen as a contractor hiring him out and forced to acquire liability and workers comp and depending on the state trigger "Contractor License Laws" or trigger the requirement to be licensed for jobs over $500.00 dollars!

I have a couple of really good handyman guys I work with, but I keep a completely arms length relationship and allow them to work for who they choose, when they choose, however I treat them well and I don't have a problem getting their attention for a new project within 3 to 5 days!


                                  GR

[mcwagner]

The employee/contractor evaulation is based on facts and circumstances, and not "prefer to" or even the presence or absence of a contract.

A person who shows up where you tell them, when you tell them, who must do the work themselves using your equipment at your location is an employee.  The employer controls the working relationship.

A person who is in business for multiple customers, who has made an investment in property and equipment (has a risk of loss), who sets his own schedule, can subcontract the work out (as opposed to doing it personally) is an independent contractor. The individual controls the working relationship.

Employees are paid by employers who bear the burden of paying half of FICA/Medi and reporting/remitting taxes.

Independent contractors are paid for the job, and are responsible for paying their own taxes, including BOTH halves of FICA/Medi as self-employment tax.

[kkiefer216]

The worker would be using their own equipment, would be able to come and go as he pleases (as long as the work is done in the agreed upon time line), and would be allowed to hire other workers to complete the job as long as the quality of the work is done the same as what was expected if he was doing the work. 

There would only be special circumstances where things needed taken care of at specific times (i.e. emergency plumbing issue, etc...).

Would this make a difference or does having him receive a steady paycheck automatically make him an employee? 

[davewindsor]

The worker would be using their own equipment, would be able to come and go as he pleases (as long as the work is done in the agreed upon time line), and would be allowed to hire other workers to complete the job as long as the quality of the work is done the same as what was expected if he was doing the work. 

There would only be special circumstances where things needed taken care of at specific times (i.e. emergency plumbing issue, etc...).

Would this make a difference or does having him receive a steady paycheck automatically make him an employee? 

The key to this is whether he is in business for multiple customers or not.  From the OP, you said, "I am planning on hiring on a full time basis a contractor."

If he's working for you full-time getting a steady paycheque, then he would be considered an employee.  "Would" hire others and "is" hiring others are two different things.  If he "is" hiring others so he's only working for you part-time and can reasonably solicit new customers, he's an independent contractor.  But, from your OP, it sounds like he's an employee (working for you full-time and getting a steady paycheck).

[mcwagner]

the key (from the IRS perspective) is control. Not "working for multiple people."  I can have any number of part time jobs as an employee.

The worker would be using their own equipment, would be able to come and go as he pleases (as long as the work is done in the agreed upon time line), and would be allowed to hire other workers to complete the job

This describes an independent contractor relationship. 

Will he bill you for each job? (contractor).  Or will you pay him for 8 hours, and just tell him where to go work today? (employee). 

Can he refuse to do your job? (contractor) Or do you get to tell him what to do? (employee)

Do his tools live at his house? (contractor) Or do the tools belong to you? (employee)

I plan on offering him a salary position that will allow for him to receive a fixed amount of income for the rehab and maintenance of my properties.  I also want to have our agreement set up so I can subcontract him out

This describes an employer/employee relationship.  Especially if YOU make income by selling HIS work to others.

[davewindsor]

the key (from the IRS perspective) is control. Not "working for multiple people."  I can have any number of part time jobs as an employee.

The worker would be using their own equipment, would be able to come and go as he pleases (as long as the work is done in the agreed upon time line), and would be allowed to hire other workers to complete the job

This describes an independent contractor relationship. 

Will he bill you for each job? (contractor).  Or will you pay him for 8 hours, and just tell him where to go work today? (employee). 

Can he refuse to do your job? (contractor) Or do you get to tell him what to do? (employee)

Do his tools live at his house? (contractor) Or do the tools belong to you? (employee)

I plan on offering him a salary position that will allow for him to receive a fixed amount of income for the rehab and maintenance of my properties.  I also want to have our agreement set up so I can subcontract him out

This describes an employer/employee relationship.  Especially if YOU make income by selling HIS work to others.

Let me ask you something.  On the IRS website, it talks about there needing to be a "reasonable basis" for being an independent contractor instead of an employee, "If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable..."http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Say there's a guy named MrClean.  He sees a few job ads for an outdoor janitor at a few small plazas from different owners.  The pay is $13/hr. and they work one day a week cleaning windows, sweeping the sidewalk, emptying the garbage cans, picking up garbage in the parking lot, etc.  The employee also has to take home the tools at the end of the day because the site has had problems with theft.  MrClean approaches the plaza owners and says, "Hey, tell you what, let me do that job for $16/hr and you can hire me as an independent contractor, I'll spend the same amount of time on the jobs and do all that stuff and you won't have to pay payroll taxes, medicare, or payroll administration and I can deduct part of my apartment as a home office, phone bill, my gas, etc.  I'll just write up an invoice each week like a plumber so it looks like a business and an independent contractor relationship.  It's win-win."

They say ok and he secures three part time janitor jobs.  Auditor comes along and says, ya, looks like a business because he's doing the same thing part-time for three different plaza owners, so I'll allow the deductions and benefits of being an independent contractor. 

A year goes by and MrClean sees a full-time job ad for a much larger plaza with the same tasks--cleaning the windows, sweeping the sidewalks, emptying the garbage cans, clearing garbage from the parking lots, etc.  He also has to take the tools--his broom, bucket and squeege, etc.--home with him because of problems with theft." 

He approaches the plaza owner and says the same thing.  The last janitor who retired was an employee.  Plaza owner says sure, it'll save me some time and money if you do this job as an independent contractor and write me up invoices each week.   Because MrClean now has full-time work, he cancels his old part-time contracts with the other plazas.

A year later, the IRS auditor comes and says, "Wait a sec, you're working full-time as a janitor for one plaza and not working for three different plaza owners like before.  This doesn't look like a business.  There's no reasonable basis for calling yourself an independent contractor if you're only working full-time for this plaza owner and I don't think you're going to work part-time elsewhere if you're working full-time here so your liable.  You're solely dependent on this employer for your income."

Straight up.  You're honestly telling me an IRS auditor will allow a full-time janitor to list himself as an independent contractor in this case?

[andydallas]

I don't think McWagner means if you take the tools home your free to be called an independent contractor.

Now if the guy went to them and said "I'll let you pay me $X a month, and I will keep the windows clean on all your buildings, or on your one building",,,,they don't tell him when to work, he provides all supplies,  and he is paid per job, not per hour, and is free to take on as many jobs as he likes or send others to do the work,,,,that may pass the 'smell test', but McWagner is the expert

[mcwagner]

As I said, the number of people MrClean works for is irrelevant.

The ONLY important factor is CONTROL.

Behavioral Control:

Who determines how the work is to be done, when or where to do the work?  Does MrClean set his own schedule?  What tools, equipment or procedures can he use?  Does MrClean have to do the work himself?  Or can he hire assistants or subcontract out the work to others (or HIS employees)?  Does anyone tell MrClean where to purchase supplies or services? Who provides training?

Financial Control:

Does MrClean have a significant investment in tools, equipment and/or training & education?  Does MrClean have a risk of loss?  Is MrClean reimbursed for all of his expenses (phone, insurance)?  Does the company provide MrClean with medical benefits, pension or paid vacation?  Is MrClean free to solicit business from other companies, including competitors?

If the company controls MrClean, he is an employee.

If the company hires MrClean to do a job, and the who/what/when/where/how he completes the job is controlled by MrClean, then he is an INDEPENDENT contractor.

FYI, the responsibility for correctly classifying someone as an employee or contractor rests with the employer.  It's the employer who will pay the taxes that should have been collected as a penalty, even if the contractor correctly reported and paid the taxes on his 1040.

[andydallas]

my brother had an employee ask to be considered a contractor,,he was selling insurance but doing so at my brothers office,,,my brother went along with it.

After about a year the employee left,,later he filed a complaint saying he should have been an employee, not a contractor,,,in the long run my brother ended up paying both sides of the taxes (they guy  refused to pay)

This was not a result of any type of audit,,it was simply the employee complaining