IRS's "20 Common Law Factors" of 1099s vs Engineering Best Practice?

[beej67]

Here's what I'm struggling with:

I'm starting up a single owner LLC to do engineering consulting, and I have several friends who want to do work for me on a 1099 Contractor basis. I'll carry the E&O, stamp the work, etc. I'm well on my way, should be 100% up and running by the end of the month, then I run into the IRS's "20 Common Law Factors" to decide whether someone is an employee or a contractor. My conceptual business model passes on most of these, but there are a three that really burn me:

"No Instructions. Independent contractors are not required to follow, nor are they furnished with, instructions to accomplish a job."

"No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods to accomplish the work. "

"No interim reports. Independent contractors are hired for the final result only. They should not be asked for progress or interim reports."

As I understand it, the engineer of record is bound by ethics and law to oversee anything they're stamping, and that oversight should be done by periodic checks of the work others are doing for him, telling them to fix stuff that's wrong, and explaining to them how to fix it if necessary.

It seems quite a bit like the IRS has rigged the rules to make 1099 subcontracting for engineering flat out illegal. Yet I hear of folks who do it all the time. So my question is this - how much of these "common law" rules for 1099 contract work must the engineering sector follow to be on the right side of the law?

 

[rbulsara]

Long and short of it is that you cannot have someone substantially working as your employee. If they are not independent business on their own, the IRS will and does come after you. As for as getting away goes, someone may get away with a murder that does make it legal. Computerized filing have made finding such ploys relatively easier. It is just a matter of manpower, that IRS decides who to go after, I think. So do not count on getting away.

Rafiq Bulsara

http://www.srengineersct.com

 

[rbulsara]

I meant "...substantially working indefinitely on 1099 as your employee".

Rafiq Bulsara

http://www.srengineersct.com

 

[beej67]

So if I contract them job by job, and pay them job by job, and don't regulate their hours or anything, but they only ever work for me because they can't find work elsewhere because the economy sucks, am I in danger of having the IRS come down on me?

 

[rbulsara]

Ask an accountant, but if you do use them regularly at least you need to withhold their federal and state income taxes, as applicable. That is the bottom line. Now if they work more than certain hours per week for you, they may be considered your employees. Look up applicable labor laws.


Rafiq Bulsara

http://www.srengineersct.com

 

[zdas04]

Good idea to check with a CPA. When I was starting out, mine said that I needed to be careful not to receive more than about 1/3 of my income from any single company (any single 1099). Luckily my biggest client (about 45% most years) doesn't consolidate the 1099 from different entities so I get 3 forms from them, none anywhere close to 1/3.

I did some work for an Oil & Gas company a couple of years back that everyone except me was on long-term contract (had UserID's, card keys, dedicated office space, etc. for years on end). I asked how that worked and they said that they all work for a company that pays their SSI and provides W-2 forms (instead of 1099) and the Oil & Gas company provided one 1099 to the "employeer". Everything was legal and above board. Your contractors might be able to work through SOS or someone like that and keep things legal.

David

 

[pmadson]

One of the issues with having folks work for you on a 1099 basis is that some E&O insurance policies will not cover you for that project if something happens. Many policies require you to only use insured subcontractors, so if these folks don't have their own policies, you may find yourself without coverage if you need it. Check with your agent.

You can always hire them on a "part-time-as-needed basis" as a W2 employee. You'll need to buy a worker's comp. policy in the state that they live in, withhold taxes, pay unemployment insurance, employer's half of FICA, etc. Unfortunately, this costs more money and is much more of a hassle then simply 1099-ing someone. I'd recommend having a payroll service do this for you...it costs more money but it's worth it because they can handle the details for you. I spent a year doing payroll myself on Quickbooks using their cheaper service, which is a much cheaper option if you don't mind spending time on it.

Having said that, I know many small-shop engineers and architects who have people work for them on a 1099 basis, some even full-time. Sometimes the subs have their own policies, other times they don't. So far, they have not had issues. As long as the subs pay their taxes and never make an issue of the fact that they should be a W2 employee, and the consultant doesn't get sued, they may never have a problem. That is a business risk they are willing to take.

Good luck! Once you figure out all the regulatory crap, having your own business is so much more satisfying and secure than having a job.

Pete Madson

http://www.npcg.net

 

[beej67]

Thanks for the responses. I'm talking with a lawyer early next week about it, but hearing personal accounts from engineers has a lot of value and will help me know what questions to ask him.

 

[brandoncdg]

Now that one of my partners is kind of on hiatus I am having to fill out our E&O renewal insurance forms. They do ask if any client pays a certain overage percentage.

I would suggest finding an insurance company and getting their form to fill out as this also may help with your question on top of all the other stuff.

You can always email me to see the one I am filling out for our company. Notice my website for further info.

Civil Development Group, LLC
Los Angeles Civil Engineering specializing in Hillside Grading

http://www.civildevelopmentgroup.com

http://www.civildevelopmentgroup.com/blog

 

[IFRs]

Help your workers to become LLCs on their own, then you have no issues.

 

[beej67]

If they were LLCs on their own, wouldn't they also have to carry E&O?

 

[zdas04]

Yes, the whether the person doing the work is working through an agency, their own company, or anything else there still has to be a 1099 to that entity and your E&O insurance can't cover them.

David