Contractor vs. Employee, What's The Difference
We begin with Zach Zach with the show. How can I serve you today Sir Hi Josh thanks so much for taking my call Before you started in my question, I'll just give you a brief background on my situation So I work as a as a project manager and for the last couple of years, I've been contracting through a contract firm So I was laid off a couple of months ago obviously to the coronavirus but luckily, I was able to land a new position yesterday. In the process of searching for jobs, I. Several shooters. But one recruiter I brought up the option of receiving my income through my own. LLC. So the way I the way I see it. Essentially, my options would be to work as a W. Two employees. So where I would get an hourly rate from the contract firm I could get paid through the LLC So. L LLC would be the employer who hires me would be paying me through that firm at contract firm. this option would pay as I. Understand it about three to ten dollars an hour This is an hourly rate. So and then the last option, which is something I've been wanting to do but I want to hear your thoughts on this is you kind of cut out that middleman completely stand up my own LLC and maybe pay like a finders fee to a recruiting company. So I'm just hoping you could discuss some of the pros and cons of these options and Let me don't you think It's a good question. The first thing to begin with that you have to start with is, are you a contractor or are you an employee? This is an area where the IRS has started to become much tighter in recent years and it's an area that's under dispute I. Guess Most famously when California recently passed new legislation affecting contractors and making it even harder to be a crunch actor in that state where you saw. Uber and the various ridesharing services and affected by that where they're trying to classify the contractors as employees, and that is leading to major problems. But the IRS regulations on the subject are fairly clear, and if you'll begin with those those regulations, then you'll get an idea of which path is best to go. So if I just use these words without actually defining them if I just simply use these words of employee and contractor, are you an employee or are you a contractor? So that that's the thing I could be. I well Dr Yeah whether I get paid to it w two I'm still contracting. Contract firm respect me up with the employer that that needs the work done. Okay. So in this situation, the company hiring company is going to hire a contract firm and either you will be an employee of that contract form firm or the employing company will hire own contracting firm. I I believe. So I, think what you're saying that second part is they would be I would have my own LLC and then A little confusing. But like that the contract I kinda the Middle Man. So regardless of buying paid through W. Two or paid through like ten ninety, nine, independent contractor it would go through the contract farm. So in your situation. In your situation, this may work out fine for you to do be deciding this. But in my experience answering this question much of the time when I'm asked this question, the answer is simple. You simply go and ask what is the IRS say about whether you're a contractor or an employee, and let's follow that and I'm going to give you how the irs defines that and then move onto answering your specific question. But the IRS uses three distinct categories to create a set of facts that will lean in one direction or another in those three categories are behavioral control, financial control and the relationship between the worker and the employing company. Behavioral control a worker is an employee. When the business has the right to direct and control the work performed by the worker even if that right is not exercised and that is probably the most significant one by the way, why is this important because there are significant penalties for the hiring company if they miss classify somebody as a contractor who is actually an employee and so the biggest danger is not for you as the. Worker it's actually for the company, but if the were if the company has the right to control the work performed by the worker, then you are an employee behavioral control categories are the type of instructions given such as when and where to work what tools to use or where to purchase supplies and services receiving the types of instruction in these examples may indicate that a worker is an employee. Degree of instruction more detailed instructions may indicate that the worker is an employee less dealed instruct detailed instructions indicate less control indicating that the worker is more likely to be an independent contractor.