Sunday, January 16, 2011

Independent Contractors and the IRS

Dear Labby,
How do I go about adding "Independent Contractors" to my pet sitting business and avoid having them being classified as "Employees"? This has not been an issue in 2010, my first year in business, but I can see a need coming in 2011.
Any advice you can give would be most helpful ... thx!  Cynthia

Dear Cynthia,
Excellent question! Here are the guidelines I have followed:

• ICs invoice me for their work, clients pay me. IC usually picks up the check and gives or sends it to me, or I bill to client's credit card.
• Clients book through me
• I do not supply any materials like crates, food, etc. or reimburse for gas. I do supply forms and all have my business name on them.
• ICs buy their own insurance- though I am able to add them on my policy at a reduced rate, they pay it.
• ICs must file their own Schedule C on their taxes, and I supply a 1099 form to them at the end of the year
• ICs are able to pursue their own clients separate from mine, under their own business name
• ICs sign a non-solicitation agreement, in other words they can't suddenly convert one of my clients into theirs. The agreement also states that they understand they are an Independent Contractor and responsible for their own taxes, insurance and expenses.

For a more official answer, the IRS has guidelines posted on their website, and each state has its own requirements also. For example, here is California’s site: http://www.taxes.ca.gov/iCorE.bus.shtml

From the IRS website:
If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-MISC (PDF) needs to be completed, and a copy of 1099-MISC (PDF) must be provided to the independent contractor by January 31 of the year following payment. You must also send a copy of this form to the IRS by February 28.

Good luck with your pet sitting business in 2011!

Sincerely,
Labby

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5 comments:

Danielle Chonody said...

"ICs sign a non-compete agreement" - actually I'm not sure if this is correct. Technically they can compete with you by having their own pet sitting business which you have already stated.

It's actually a non-solicitation agreement - which means that they cannot solicit or work for your clients.

Terry Albert said...

Good point- much clearer way of saying it, because yes, they can have their own business too. I'm going to change the original text- thanks!

Anonymous said...

I'm new to this site. I'm still working with the inspector to get my home occupation permit approved. He says the dogs must be enclosed at ALL times, and must not use my yard, or property to do their "business". I have to take them off site to do that. I've noticed that every home doggie daycare on the web uses their own yard. What is going on? He actually told me I would have to find a way to get them to POOP inside!! Help

Anonymous said...

Thanks so much for your answers. I am a bit confused though; I am a pet walker and the person who hired me as an independent contractor had me sign a so called non compete agreement that I cannot start my own pet walking business within a 20 mile radius. However I have other people, not her clients, asking me to start walking their dogs. So I think I can have my own business as a dog walker just walking other dogs, as really, can she stop me or sue me for walking or caring for other dogs on my own? I am totally not wanting to do damage to her in any way, however, these owners will pay me more and I want those dogs to walk. I am an independent contractor after all, so she cannot say anything about that right?

Terry Albert said...

I believe that if you are restricted from doing work for yourself or other companies, you can legally be considered an employee in some states. An independent contractor is basically a freelancer- you do the same work, or similar work, for a number of different companies on an as-needed basis. I don't think she can restrict you. Check with the IRS or your state labor dept to see what the regulations are and how they apply to you.