Boy, does this debate get me heated more than anything else when talking business… Not for any other reason than 90% of the time, the people who opt for “subs” are doing it illegally, and could care less.Here’s why:Many people think they can just pay whoever they want as a 1099…but the problem with that is, there’s really a fine line with who is a subcontractor and who is not. Let me help you identify who is not a subcontractor, and who is an employee.Do they work for anyone else but you? EmployeeDo you tell them what time to be at work? EmployeeDo you provide the materials / equipment? EmployeeDo you provide workwear/uniform? EmployeeCan they make a profit? No? EmployeeCan they suffer a financial loss? No? EmployeeNow, don’t get me wrong - having a subcontractor based business can be very lucrative and, if done properly, can be a tremendous advantage…You don’t have the responsibility of keeping steady work, and you can avoid “employer taxes” and other “insurance”…But, the problem I see with most contractors is, they just hire whoever and label them as “subs” and everything about them screams “employee!”Now, you may be thinking…”Dude, chill out. So what…it’s no big deal…”It really is though.Let’s say you bring on a painter for your painting business.He has no insurance, and he doesn’t have a workers’ comp exemption. You pay him to paint a house for you in the sum of $2000.You collect payment from the customer, and cut him his share of $2000.You’re going to get the deduction on that $2000 as a labor expense - good for you.The worker?He’s still viewed by the IRS as a W2 employee, so he doesn’t get favorable business exemptions like you do to offset his "costs" for operating his "business" that you subcontracted.Actually, he’s responsible to pay taxes on that entire $2000He doesn’t know any better, and he’s actually super happy that you’re giving him a check for that amount! "What a guy..." he thinks.You guys enter this engagement for the next 6 months, and the total of which he’s been paid so generously by you has been $40,000.As you continue to rack in the cash by saving on having workers’ comp and paying your fair share of employer taxes…Buddy boy has a looming tax bill ready to wipe him out…Tax time comes, and he’s eager to get his nice tax return that he eagerly waits for each year to help him get a jump start on the new year.His tax preparer shocks him with a $10,000 owed bill for income tax…and he says, “this couldn’t be! My employer was supposed to be taking taxes out for me!”She files a report, and now you’re on the hook for avoiding employer taxes.Not to mention the many other drawbacks on his end (like being unable to finance a car, rent an apartment, or buy a house because he doesn’t have paystubs proving his income, and in order to prove income as a business you need to file as a business and have 2 years of tax returns, all of which he didn't know about)Now, let me explain to you the right way to have a subcontractor relationship:You own a painting business. You find a painter.He provides you with General Liability insurance, and a workers’ comp exemption that you have on file.He most likely has a LLC in his name, and if he doesn’t it doesn’t matter. As long as you have these two things, you’re good.You find work, and provide him work, but in this case, he does the work his way, with his tools. He shows up when he wants, and leaves when he wants.He has the ability to suffer a loss or a profit based on whether or not he gets the job done in a certain time. If he drags the job out, he’ll lose money. If he gets it done quick, he’ll make more money.You simply check the final result and pay accordingly.You then would garnish a small network of subcontractors, this way, he is not 100% tied to you as his “employer” and other contractors have the ability to bid on the work as well.If you don’t plan on doing it this way…don’t do it at all.In my honest opinion, employees are way better - you can build a company culture, and you can put together a rock-star team that is loyal to your brand and company. Yes, it takes more work, and you have to pay a little more in taxes, but this offsets the cost of a subcontractor in most cases, because they're generally more expensive than hourly employees. see hubwealthy.com/wealthy
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