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"It's a two-way street. Tey look at what we provide and we look at what they can provide. If it works, they're hired. It's an agreement." For those unsure if they should classify a worker as an employee or contractor, the IRS developed a list in 1987 detailing 20 factors to determine if a person should be classifed as an employee or a contractor. Tey are as follows: instructions; training; integration; services rendered personally; hiring, supervision and paying assistants; continuing relationship; set hours of work; full-time required; doing work on employ- er's premises; order or sequence test; oral or written reports; payment by the hour, week or month; payment of business and/or travel- ing expenses; furnishing tools and materials; signifcant investment; realization of proft or loss; working for more than one frm at a time; making service available to the general public; right to discharge; and right to termi- nate. For a description of each criterion, visit http://www.irs.gov/pub/irs-utl/x-26-07.pdf. THE IRS emphasizes that although the aforementioned 20 factors are important, the weight of the factors may vary based on the circumstances; relevant factors may change over time and all facts must be examined. More recently, the IRS identifed three categories that also aid in determining sta- tus: behavior control, fnancial control and relationship of the parties. In addition to federal requirements, each state has its own criteria. Van Cura also rec- ommends talking with a good accountant and an attorney who specializes in a construc- tion-related feld. "Whatever you pay for that advice will be worth every penny." | employees as contractors and that times have changed; the IRS will go after big and small companies alike. "All the government agencies are cracking down on companies that have employees treated as subs. From a company health standpoint, it doesn't make sense to take the risk of treating someone as a subcon- tractor. If the IRS knocks on your door and wants to see your fles, the penalties could literally put someone out of business. Why would anybody want to take that risk?" YEARS AGO, Van Cura worked for a compa- ny during a time when money was tight. After putting in his 40 hours per week, he asked for more work, which the company granted, but was unable to pay the time and a half required by law. "Ten years after I stopped working for those people, I got a call from the government saying they owed me money for working time and a half," Van Cura recalls. "It wasn't just me — it was several others, too. Years later, this company was responsible for that, despite our having an agreement. Te government doesn't care. You live by the law or you die by the law." Van Cura tells that story to illustrate just because a remodeler may currently exist in a gray area, doesn't mean that situation will con- tinue to be OK. "If you've had a situation that doesn't ft the subcontractor rule, they can go back in time for many years," he says. "Even with subs you need to be careful. Scrutinize whom you are hiring." Van Cura compares the decision between hiring an employee or contracting with an- other company to the diference between get- ting married and dating. "When you have an employee, you're getting married," he says. ew business owners aren't looking for a way to save a dollar. A potential sub- stantial savings is using trade contrac- tors rather than employees. Although efective fnancially, business owners must be educated about the IRS defnitions of employees vs. subcontractors to avoid consequences. Don Van Cura Sr., MCR, CKBR, GCP, CLC, UDCP, president of Chicago-based Don Van Cura Construction Co. Inc., ex- plains there are state and federal criteria for what qualifes a person as an employee vs. a contractor. When you take on an employee, costs quickly escalate through salary, benefts, workers compensation, withholding taxes at the state and federal levels, social security, Medicare and unemployment tax. EMPLOYEES ARE on a payroll. "Tey ask me every day where to go and what to do," he says. "Tat in and of itself makes them employees — that I have control over how they function. If I provide transportation, give them training and set the amount of hours they're working, there's no way I could qualify those people as subcontractors." Subs, on the other hand, maintain a truly separate business. For example, Van Cura will call a plumber who has his own shop, his own certifcate of insurance and is incorporated. "He's a truly separate entity," Van Cura says. "He doesn't work just for me. He'll send me a proposal to do that particular project. Tere's a clarity that he's a separate entity. I don't have control over his daily activities. We might schedule a project together, but I won't tell him what time to get up in the morning." Van Cura cautions problems arise when companies look to reduce costs by treating Gray area By Laurie Banyay Understand the complexities of hiring employees versus using contractors to avoid fnancial penalties from the IRS F ForResidentialPros.com QR December 2014 39 PROFITS: NARI Recertification QR has teamed up with NARI to create a convenient way to earn credits toward your recertification. After reading this issue's article, take the test for CEUs at ForResidentialPros.com/ narirecertification.