August 7th, 2017
*Note: This applies to those of us in the US*
Did you know that even though you don’t have a massage therapist working for you who you call independent contractors, you may still have independent contractors? Let’s talk about a little-known business detail that is kind of super important, and it’s often not even noticed by a lot of small business owners, and it can cost you quite a bit of money if you’re not giving a 1099 to these people you didn’t even really know were technically independent contractors.
Okay, what the heck am I talking about? You’ve probably seen the debates or arguments 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 about all of this.
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 overhaul your entire website…fantastic idea. If that person is a sole proprietor, they’re an LLC, or otherwise not a corporation and you paid them $600 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 $600 or more in a year for things that they do for your business. 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.
I’m going to get a little bit more detailed here. This is basically the IRS’ 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 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 from you. Sellers of merchandise are also an exception. And if you pay these contractors with a credit card, that’s an exception, because the credit card processing companies issue them a statement regarding their income, so you don’t have to worry about the 1099 in that case. And lastly payment of rent to a real estate agent acting as a property manager. You will however, 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 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 knowing 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 rule, 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 on 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 unless you want to spend some serious time figure it all out yourself. Tax laws are ridiculously complicated, most tax professionals have trouble understanding some of it and staying up-to-date on it all, and 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 read this, you will technically be guilty of that, sorry, that means it is $250 per form with no maximum.
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.
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 massage therapists who are labeled as independent contractors are misclassified, to be honest. 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 may very well 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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