Employee or independent contractor: uh, there is a difference
I recently began doing some work for a new restaurant client. Despite the newness of the work, I was first introduced to this person last summer, about four months after the business opened for operations. They were in need of some outsourced financial oversight, and I pitched my services. While obviously interested, this client put off pulling the trigger on the decision until this year.
My first caution to them when I found out they were paying their employees as contract labor was to immediately halt this and treat them like the employees they were, whether they used my payroll services, did it themselves, or hired it out elsewhere. While hell may hath no fury like a woman scorned (or in my house, a woman whose dirty dishes remain unloaded by her lazy-butt husband), a business hath no fury quite like the IRS’s view of misclassified employees.
Now, this may seem like DUH territory here. I mean, if you’ve got employees, pay ‘em like they’re employees. Withhold payroll taxes, remit them to the IRS and other tax authorities when you’re supposed to, and file all federal, state, and local payroll tax returns when required. Having said that, I’ve seen this movie before. And it can be much uglier than that dude without a nose from “Harry Potter v. Predator” (or whatever that show is called).
The IRS doesn’t dink around when it comes to stuff like this. If you have people who show up to your place of business to cook chicken, bus tables, pour drinks, seat patrons, blend smoothies, or even occasionally break dishes, and they are under your control and direction, then by gosh they are EMPLOYEES, not independent contractors. This is true no matter what your uncle or best friend or food provider or even your employee himself says.
There are all kinds of ways that tax authorities can a) find out that you’re doing this b) reclassify these people as employees instead of contract labor and c) pretty much make you cough up a boatload of cash to not only cover the taxes you never withheld, but ding you with penalty and interest as well. Filing the income tax return with a big g00$e egg on the salaries/wages line but an amount for contact labor is one. Issuing 1099s instead of W-2s is another. And third, but perhaps most likely, is that an employee will gripe after receiving a 1099 instead of a W-2. And that gripe could very well go in the direction of the IRS.
This is not a whirlwind of trouble that you want any part of. Do right by your business, your employees, your ethical side, and your ability to put your head on the pillow at night. For tax purposes, treat your employees as just that - employees.
By the way, I think Predator would win. Even though he’s one ugly, er, Hollywood monster.
Tags: accounting, Employee, Independent contractor, Restaurant