Stan: See, there you go.
Jeff Law: I'll have to know.
Stan: All right, today is going to be one of the most informative sessions for all of you guys that have questions about hiring your first employee, and what it means to be a subcontractor versus an employer, which is something that typically happens within the landscaping and construction industry. I have Jeff Law with Law Tax & Financial here with me today. Jeff is the expert, I'm not the expert. I have the same questions that you guys have. I have 30 years experience hiring people and going back and forth with the IRS on different matters, I never seem to win though. First off, let's go over the question of; you're just a brand new contractor coming out Jeff, and you're going to hire your first person. What do you do right out of the gate? What's the first things?
Jeff Law: Well, once you have that person when you're ready to put somebody to work, you're going to want to determine whether they're an employee or a contractor, which I'm sure many of you have heard of and you've alluded to your issues with that in the past. As many of you know, it's a fine line sometimes. They do have a criteria, which we'll get into later, but once you determine whether they're a contractor or an employee, you're going to want to have them sign either Form W-9, which is for contractors. All it is is their federal ID number or their social security number, if they're a sole proprietor, and their name, or their name of their business and DBA, just real basic.
Jeff Law: You're going to have that on file because you're going to need to issue them a 1099 at the end of the year, and of course, there's fines and penalties as they have for everything if you don't do it correctly with the IRS, if you don't have that form identification information at the end of the year. Conversely, if they're going to be an employee you'll have them fill out the W-4, which most people are familiar with. That's the one where you're checking single, and you're going to claim zero exemptions or two exemptions, and then their address and again, their identifying number, which is going to be their social security number if they're an employee.
Jeff Law: The other thing that I recommend, that I do for my business here and I know many of my clients do, I know many don't as well, is have your employee and you, the employer, sign an employment agreement, which is just going to spell out a lot of the basics. You know, you get off Christmas, Thanksgiving, do you get the Friday after off, when do we pay, every week, twice a month, just all that kind of stuff, and list out what their duties are too, if they're going to be a landscaper, if they're office.
Stan: How clear do you have to be on the duties, because a lot of times with the contractors, our duties vary so much. We may be digging a swimming pool one week and then demoing a house another week, and cutting lawns, and weeding the garden and putting mulch in. Do we want to put a generic blank statement in, we'll be working within the landscape industry versus something else? What do you think about that?
Jeff Law: Definitely, and usually you'll have an all encompassing last statement in there like, 'and all other duties deemed part of your job by a supervisor,' or something to that effect. You don't have to make it wordy but just kind of cover that it isn't just if we say you're just doing digging swimming pools, you'll want to say, 'and all other duties.'
Stan: So, I would think another important factor in that landscape or that employee agreement, not just for landscapers, for general contractors and contractors in general, would be the hours of operation, the hours you're expected to work. I think that would be almost as important as laying out the duties, because you can always say it's Monday to Friday weather permitting, Saturdays if you guys work Saturdays. A lot of you do, some of you don't. You're going to want to point that out because a lot of people don't like to work on the weekends and you better set that expectation in writing that yes, we work weekends.
Stan: I set it within my company, I say we work Monday through Friday, Saturdays are on the table but we try not to work Saturdays. But, I make sure that all my employees know that if you've got to come in on a Saturday, you have to come in on a Saturday. I put that in there right out of the gate, but I also let them know I don't want to work Saturdays as much as you don't.
Jeff Law: Right, and we have that here as well because we work in a similar ... maybe summer is your busier time in a construction landscaping type field. We obviously have tax season where our employees have to work evenings and Saturdays, which nobody likes to do, so we spell out a little [inaudible 00:05:09] as well. Yeah you're right, you don't want there to be surprises, and obviously you're going to go over a lot of these points in your interview process with somebody before you hire them. But, just kind of have it recapped in the employment agreement is what I would recommend.
Stan: So, you've hired your first person and now you've got to pay them. What happens then?
Jeff Law: Yep. Again, if they are a contractor it makes life a lot easier for the owner, and you probably don't need to get a payroll service or somebody like myself with those things. They make X amount per hour, work X hours and you can just write them a check for the gross amount, and they take care of all their taxes on their end.
Stan: But they have to turn in an invoice and we're going to actually go over the IRS's official 20 point checklist for an independent contractor versus an employee before this is done. But, if you have an employee, that's a completely different story than if you have a subcontractor.
Jeff Law: It is. Yeah, it's funny they have only 20 points that you have to determine that simple question of whether they're an employee or not, right? But, that's the IRS. It's not going to be easy and obviously you're not going to satisfy all of the points one way or another, and sometimes it is in kind of that gray area where you think you have an argument for either way, then it's up to you to play it safe or not. But, it's important to understand the repercussions but yeah, if you do hire an employee, which then kind of takes all the guess work out, they're not going to have any issues with the IRS, that's always the safe way to play it. But, then you have to take out payroll taxes.
Jeff Law: Now if you, like most owners, don't have experience with payroll, you're going to probably want to hire somebody. Your ADP paychecks type are the big ones and there's lots of smaller companies as well. Most accounting firms do things like that as well. We do that here with the quarterly filings and payroll and that as well. So, you're going to have to, if you don't know, you're going to have to start withholding taxes, social security, Medicare, it's going to be 7.65% on the employees side and also on the employers side, which just means if you're paying somebody $100, you're going to withhold $7.65 from their check and then the employer has to match $7.65 basically, and send that in.
Jeff Law: Then there's unemployment insurance as well. Just to not get too detailed on the calculations, I always tell the employer it's going to cost you an additional 10% of the gross amount you're paying them in payroll taxes, and then you probably also have to pay, as I mentioned, a payroll company or an accounting firm. So, you're going to want to factor that in, a lot of people think, well I can afford to pay somebody X amount, but you have to remember the additional expenses you're going to incur.
Stan: Let's go over that real quick, this is a great point Jeff, you just brought up. You agree to pay a person $10 an hour, let's just make it an easy round number whether it's realistic for your industry or not, it does not matter. What I need you to understand is the percentages that we're going to cover right now. As a subcontractor you agreed to pay them, they actually tell you that they are worth $10 an hour, that's what a subcontractor can do.
Stan: As an employee, you tell them, "I'm going to pay you $10 an hour." What does that $10 an hour actually translate to you as the business owner in actual out-of-pocket expenses when we calculate, as close as you can get, shooting from the hip Jeff, FICA, and unemployment, and workman's comp insurance and things like that. What do you anticipate the actual out-of-pocket expense for a $10 an hour person is to the business owner?
Jeff Law: Well, it's with the taxes another 10%, so you're talking another dollar there, so now you're up to $11. Then the insurance is usually going to be, I mean, it might vary from industries but just a rough guess is, I'm just think what mine is for symbolic ... another $30 a month. So, depending on the number of employees you're going to have, if that's four weeks you've got to add another $10 on there, which isn't huge.
Jeff Law: If you have additional accounting fees is when you might add on another $1000 for the year for all the payroll and that. I mean, those things if you only have one employee, it's goin to be a bigger chuck at the beginning because it could cover you for more. So, right off the top for just one employee, it's probably going to cost you another 15%. Instead of $10, it's going to cost you $11.50 an hour.
Stan: Okay, and within our industry, taking the classifications that we've experienced into account, a $10 an hour person, at least in my area, my industry, usually cost me about $13 an hour. I experience about a 30% increase because of all the other nuances, all the categories that I have to pay in there. So, I want you guys to take that into consideration when you're hiring a person, whether it's another 15% or it's an extra 30%, it's going to be somewhere in there. I wouldn't expect it to go higher than 30%, but I wouldn't expect it to go lower than 15%. Now, you looked down when I said higher than 30%, why?
Jeff Law: Oh no, I don't think it would be that ... it won't be higher than that.
Stan: Okay, okay, okay. Good. So then, we're on the same page.
Jeff Law: No, it certainly shouldn't. And you know, depending on, I guess we'd have to look into exactly what gets to that 30%. A lot of times it feels like, I know when people first start paying people, because again that $10 an hour if they work a 40 hour week, they're going to get $400. If you're used to just giving them a check for $400, now after withholding, maybe their check's $325. But, then when their taxes are due you have to send in the $75 you withheld from their check, plus the employers side. So, you're sending in some stuff from their check as well and it does-
Stan: Now, you brought up a good point in between the lines there. Overtime. He said 40 hours, but 40 hours exists for, I guess the overtime rules at least for our state, and it's going to vary, you've got to check your own local ordinances. At least for our state if you do over $500,000 a year and have over X amount of employees, overtime is at 40 hours. If you do under $500,000 a year and have fewer than a certain amount of employees, overtime goes up to 48 hours before you have to pay it.
Stan: Each industry is also different. Trucking industries are different than other industries. You can have more hours within the trucking industry before you have to pay overtime. So, those are all really good points that we want to bring up. You have to take that into consideration when you're hiring your first person. If your overtime kicks in at 40 hours, you're going to want to watch that person at the end of the week and you may have to bring in a second crew to take over, especially if you're used to working 50 or 60 hours in a week. You may need to switch things up a little bit to keep your guys at 40 hours, or you're going to have an extra tax bourdon and labor bourdon, right?
Jeff Law: Correct. You can consider bringing in people on a salary then and then that's going all the way back to the beginning in the employee agreement. You know, overtime is required during certain times of the year and then that's a way that a lot of people will deal with not paying overtime. As you know, many people in the corporate world, there's not really such a thing as a 40 hour week, but when you're paying people on the hourly basis as is the norm for this industry, that is correct.
Stan: So, we haven't mentioned salary. That's a great option, Jeff.
Jeff Law: It is.
Stan: So, when you bring a person on as a salary, do you have any limitations? Can you work a person indefinitely or is there ... you know, even though we wouldn't because you'd burn them out. But, realistically is there a rule that the IRS has that even a salaried person can't work over 60 hours a week, or 70 hours a week?
Jeff Law: Salary's under a different classification. Overtime rates apply to hourly workers.
Stan: Oh great, good information. So, let's talk about ... let's go into the 20 point checklist unless there's something else you want to touch base on when you hire your first employee?
Jeff Law: No. The big thing is you want to make sure you get those documents. People all the time, and I assume in this industry it's very common, you think you've got a great person, they make it part of a week and they're gone, and if you didn't get their social and have the form filled out when you need to send a 1099 or W2- at the end of the year, that's when you run into issues. So, I just want to stress the importance of getting that. I know that a lot of times people are working for a few weeks before I get contacted and then they say, "I need to pay him. What do we do now?" So, you want to do this stuff on the front end.
Stan: Okay. Very good. Good.