So I want to get some of your thoughts, pros and cons on this one. I have an employee who has been with me for several years, he recently opened up his own company in the next town over just outside of our “do not compete”. I’ve kept him on while he’s getting his company going as it helps both of us. He’s now wanting to switch from a part time employee to a subcontractor for me. I’ve always done employees in the past and I’m not quite sure how to structure it as a subcontractor. Or if I’m scheduling the jobs, processing payments and saying how I want the jobs done (he’s using his own equipment) if that will pass the test with the IRS that he is actually a subcontractor.
Read up on what Uncle Sam has to say about it. They are pretty tight with their regs.
I do know he has to have his own tools and vehicle and working with you cannot be his only source of income. He needs his own insurance too. You have final say on the final quality of the work but you can’t tell him what procedures he has to do to achieve that quality.
My question would be, “why?”
There are more advantages to being an on-the-books employee vs. a sub.
That’s why we are all self employed right Alex? Sounds like the guy is smart and wants to be on his own and is simply trying to make his transition.
Let me break down what’s about to happen, regulations aside(this will not fly in California after January 1 because of AB5):
- He’s wanting to be a sub so he can make his own schedule and not be beholden to you any longer.
- There’s going to come a day soon, where he has a big job that’s “worth” more than a day’s work with you
- He’s going to call you and say, “hey I can’t come in today, I have to take care of some things with my business. I’ll be back tomorrow” or whatever day you have him scheduled
- He’s going to demand more money. He’s now doing his own jobs the town over and makes more off one residential than what he makes in a day with you, assuming he half way knows what he’s doing.
- After repeating steps 1-4 a few times, you’re going to realize this doesn’t work.
How do I know this is what will happen? I’ve been doing this for about 15 years total and have seen this a million times and have been burned several times. Best thing to do is cut him loose and let him know you’re doing him a favor by allowing him all of the time he needs to do his own thing. He’s going to say “well I don’t have enough work yet to just leave, I really want to keep working”. Ignore this. He wants to put his big boy pants on or he doesn’t. I’ve personally helped 4 previous employees get their own businesses going. Only 1 has survived and that’s because he actually took over his dad’s window cleaning business. 1 came back to work for us for 2 years and went on to something totally different. No clue where the other 2 are. But the one thing I did with all of them was cut them loose. But I kept the line of communication open and gave them all the help I could, I liked the guys and I wasn’t mad that they wanted something for themselves. But I wasn’t going to let their ambitions ruin our schedule or short change my customers as it had in the past.
If you like this guy, letting him go is the best thing you can do for both of you. If you want to see him succeed, be a mentor to him.
Just my 2 pennies.
@mshramek that was an awesome and well thought out reply. More useful than most because it comes from your actual real-world experience.
can you please summarize AB5 in California?
forget sub and 1099, let him become a corporation instead
hire him for your overflow or recurring stuff
you’re paying a corporation (well, he’s invoicing you), everybody’s taxes are paid, everybody’s happy
You can’t sub out any work to anyone or any company that is the same line of work that generates revenue for your business. So if you have a window cleaning company and you sub work out to another window cleaner or “company”, you have to take on that individual performing the work as an employee. Plain and simple. You can lookup the ABC test standard that was created by the Dynamex case. It’s a huge huge issue in CA right now.
You can still hire companies to do work that isn’t your line of business, for example hiring someone to build a website. Since you don’t make money by making websites it’s fine. But if that is your business, no more hiring freelancers unless you actually employ them.
Right now, everyone is adhering strictly to the law because we don’t know how closely the franchise tax board is going to scrutinize our 1099’s at the end of the year. Knowing them, it’s probably going to be a fine tooth comb. If you get caught in violation of this law there are penalties, back employment taxes you’ll have to pay and back workers compensation coverage to pay. Not to mention the additional penalties from the labor board for not having work comp, and back pay and late pay fees on top. One violation could potentially wipe out a business.
Good old California. Stories like this always remind me why so many Californians are showing up here in Texas.
As awesome as I hear California is as a place, I seriously don’t think I’d ever start a business there.
I’m not worried about it. I don’t sub work, employees only. But I know several people that try to 1099 everyone and low ball everything because they’ve avoided actually hiring people. Those guys are in trouble.
I had 3 part time employees through the first half of the year and the insurance and taxes were killing me. I realised the way I “employed” then was as contractors. they had their own equipment, vehicles, came and went as they pleased, two had their own insurance and the third was flaking out- so I switched. it was a great idea for 3 months. Not much changed until the holiday season. When I got busy and scheduled work for 3 to 4 people and they stopped showing up anywhere close to the time of the appointments or left early or did not call at all, informed me they were taking the next two days off add they were leaving, etc… I was left hanging but knew I’d done it to myself and @mshramek and I talked about what bre explained above but you know- stupid choices are best made for ourselves! All the work got done but the week before Christmas I had work scheduled for a 120 man hours and I had my “contractors” help me for a total of 32 man hrs. I’ve got SO MANY things to work in my office, scheduling, advertising, etc. I’m wondering how I’ve kept this thing going 2 years. good luck to you and Mark is spot on.
Agree with the above poster. How many of you got started that way…you see what you can really make “on your own” and you are addicted to that taste. I have been with my employer since 2006. I was told almost 15 years ago “You are more than welcome to use my tools, do your own jobs-- just don’t let it interfere with my jobs”-- And 15 years later, it never has. My boss is old school, we laid out the groundwork before I even started working back in 2006. I work Monday-Friday full-time and have since 2006, there has never been a week I had off due to work shortage or a payroll issue where I did not receive my check-- and in turn my boss has never had to worry about me showing up and getting the jobs done.
So what do I do? I tell any perspective clients I am booked the whole week and have an opening on Saturday and/or Sunday if they would like it done then. 99 percent of the time, there is never an issue. Customers actually tell me “Wow, full-time AND you are here on the weekend, that is so nice to see in a young man”-- (Remember guys it’s YOU who they hire…personal touches set you apart.) All of my commercial storefront work (Not much, just like 9 jobs) are done on Saturday once a month. I make what I make for a full day in 3-4 hours. Guess what? Cool…extra cash on the side. Is it enough to replace my salary? NO. So why rush? Build it up gradually, see where I am in 5 years…and if it was time I would let my employer know 2-3 months in advance that he will need to find a replacement. This “2 weeks notice” stuff should not apply to window cleaning…I would treat my employer how I would like to be treated and given plenty of time to find a replacement and even train that replacement and show him the ropes. But, I know that isn’t the case most of the time. That is what separates your character from others, and what people will remember in the long-term (Don’t burn bridges)
As for the laws, last I checked you can’t have more than 20-30 percent of your income coming from subbing jobs to you. Otherwise you are an employee technically. From my understanding you need plenty of your OWN income coming in BEFORE you take on sub work-- which is fine is you are pulling in 2-4k a month on your own and want to add another 500-1k from another company. Not when you are making 200-500 a month. Now I may be wrong as I am not a CPA-- but that is something I would sit down with and discuss. Otherwise I think more people would just say “they subcontract” and take a 60-70 percent of the job. Uncle Sam doesn’t like that, Uncle Sam will make sure he gets his-- best to play by his rules.