August 7th, 2017
Did you know that even though you don’t have a massage therapist working for you who you call independent contractors, you probably still have independent contractors. Let’s talk about a little-known business detail that it’s kind of super freaking important okay and it’s often not even noticed by a lot of small business owners and it can cost you buttloads of money if you are not giving a 1099 to these people you didn’t even really know we’re technically independent contractors.
Okay, what the heck am I talking about? You’ve probably seen the debates or arguments on a lot of the massage Facebook groups anytime the discussion of employee versus independent contractor comes up. I’m going to talk about those differences in a few minutes, but that’s not what this main part is about. For those of you who are unaware I’ll get there, but first for those who already know that and don’t want to hear me beat a dead horse how about we get into these little-known tax issue that can cost you big time.
So, let me first say that I am NOT a tax professional, it is always best to consult with a tax pro with any questions and any filing at all, so talk to a CPA, talk to a tax professional get their word for it too. Anyway, according to the IRS and the Department of Labor an independent contractor is a person, or business that provides goods or services to another business. That doesn’t just mean a massage therapist who works under your business name, it means anyone who does work for your business who isn’t an employee. According to tax laws you have to provide a 1099 form to all independent contractors who you pay $600 or more in a year. Since they see all individuals, partnerships, LLC’s, limited partnerships, and estates that do work for your business as independent contractors that’s a lot more people than you probably realize. So, let me clarify and clean this up for you a little bit because that probably sounded a little confusing and its tax law, it usually is pretty confusing. So, let’s say that you hired an amazing designer to overall your entire website great fantastic idea. If that person is a sole proprietor, or they’re an LLC, or otherwise not a corporation and you paid them six hundred dollars or more for that web design, you need to issue them a 1099 come tax time. Same thing goes for any other goods or services that are done for your business if they are not a corporation and you pay them six hundred dollars or more in a year for things that they do for your business, then technically they are an independent contractor and you need to give them a 1099. For another example when I get brought into a spa or a massage clinic to teach CE classes for the therapists, I go fill out a W-9 and I get issued a 1099 come tax time. That’s because I’m technically an independent contractor doing a job for them. I’m doing work for that business; I am NOT a corporation and they pay me more than six hundred bucks. Is this making sense for you guys? Let me know if you have any questions at all. I’m going to get a little bit more detail here. This is basically the IRS’s way of making sure that everybody is reporting their income. There’s a lot of backlash against this because it’s a pain, but it’s the law and I don’t make them I just teach them. I’m doing my best to stay off my soapbox here. Okay, there are some exceptions to this, actually a lot of exceptions, but I won’t run through the full list here. As I said before, consult with a tax professional please about everything. Some of the most common exceptions: vendors who operate as an S corp or C corp, meaning they are a corporation they do not need a 1099. Corporations do not do this, they’re corporations, they’re not an independent contractor they don’t qualify as independent contractors. Sellers of merchandise are also an exception, and lastly payment of rent to a real estate agent acting as a property manager. You will need to issue one to your landlord unless they fall under another exception, so again there’s all kinds of exceptions and weirdness to this so consult with a tax professional to sort all the stuff out, I cannot say that enough. I can’t guide you on your exact situation because there are a ton out there and there’s a ton of exceptions that only a tax pro is going to know.
Another weird aspect to this, because you know its tax law and it’s weird, is lawyers. As strange as it is, despite being in charge of upholding the law and things, they apparently can’t be trusted to report their income. So, you have to issue them a 1099 even if they’re incorporated. They are, I think, the only corporation exception to the rules, but I could be wrong, on that. Ideally, you want to get a W-9 form from anyone who you know you’re going to be paying $600 or more in a year, before you ever pay them, it’s just going to make things a lot simpler. Then, come the beginning of the year, you send out all of the 1099s before January 31st. Then, you also have to claim all of these as specific independent contractor expenses in your taxes. There’s a separate area when you do your taxes for what you pay to independent contractors. I cannot say this enough, get an accountant or tax professional to handle this stuff for you. If you’re in business for yourself, you need an accountant or you’re probably screwing something up. Tax laws are ridiculously complicated, most tax professionals have trouble understanding some of it you can’t be expected to know all of the nuances to it, you’re a massage therapist not a CPA.
So, what happens if you’re not giving out these 1099s like you’re supposed to? Well the penalty can range from $30 to $100 per form depending on how long past the deadline you issue the form. That’s just when you can claim ignorance. If you willingly disregard the law, and now that you’ve watched this video you will technically be guilty of that, sorry, that means it is two hundred and fifty dollars per form with no maximum. Okay, ignorance maximum is 1.5 million, I doubt you’re ever going to get there but most small businesses are never going to reach to that extent but that’s the cap. However, for willful negligence sorry, there is no maximum there so just get with an accountant and get this straightened up so that you’re ready for tax time next year that is why I’m doing this video in the summer to give you plenty of time to get the stuff together before it’s all due next January.
Now, let me take a second and discuss the difference between independent contractors and employees for a minute. That is still something that a lot of people don’t understand. I’m going to keep this very brief because the concept is simple it all boils down to the relationship between the person and the business. An independent contractor can be told by the business what to do, not how to do it or when to do it. An employee can be told by the business what, how, and when to do something pretty simple. So, if you’re an independent contractor but the business owner acts like your boss telling you when to show up, who to work on, what prices to charge, what supplies to use anything like that, you are not an independent contractor, you are a misclassified employee. Most therapists who are labeled as independent contractors are misclassified. There are very few cases where it’s actually appropriate. It’s a major issue in our industry and many others. Please for the love of all that is holy in this world make sure you or the people who do any work for your business are properly classified and getting all of the right documentation or it will blow back on you one day. If you are not sure consult with a tax professional. Let me just say one last thing, just because there’s a contract stating this and that about independent contractors that doesn’t mean squat. No contract on the face of this earth, no matter how lawyered up and legalized and nice it is will ever trump federal or state law period. There are all kinds of nuances to this sort of thing and a ton of what if factors so please consult with a professional about it, or straight up call the IRS if you’re still not sure.
Make sure that everybody is properly classified. Make sure that you are sending the right documents to all the right people and get your business in order. This is one of the not so fun parts of being a business owner, but it is also vital to your business so don’t let this stuff slide. Please share this with your fellow massage therapists so no one is left behind on the info. This is something that a lot of small businesses in general not just in the massage industry but a lot of people just don’t know so please help spread the word.
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