Re: tax issue -- writers working for me?

Subject: Re: tax issue -- writers working for me?
From: Andrew Plato <intrepid_es -at- YAHOO -dot- COM>
Date: Sun, 28 Mar 1999 00:04:55 -0800

Ahh, fun.

If you hire other people you need to do it in one of two ways: W-2 or 1099. W-2
is hard, very hard, 1099 is easy, but very risky. Some companies will not allow
you to 1099 people no matter how great they are.

W-2

You hire the person as an employee of a company you form. You will need to
create a company to do this. You will also need to learn the very complex world
of payroll along with state and federal taxes. You will pay the taxes for the
subcontractor.

The tax paying for employees is very complex. At my company our admin spends
easily 40 - 60 hours a month just dealing with our employee tax issues and we do
not have that many employees. Not to mention if you make a mistake - you're
screwed. The penalties for improperly paying employee taxes can evaporate any
margin you make off employees. Believe me - I know this one real well.

1099

1099-ing is a very simple subcontractor relationship, but it is very risky. You
need to do it right to minimize your tax risk.

First, you must subcontract the person. This means having a lawyer or a
contracting agency provide you with a contract. This contract must be written
carefully and clearly spell out that the subcontractor is 100% responsible for
all taxes. It should also very clearly state that the subcontractor is NOT an
employee of your company or the client company and therefore is not entitled to
ANY benefits of either entity including vacation, health insurace, retirement,
workers compensation, etc.

At a minimum, get a lawyer to draw up a subcontracting agreement. You're
looking at spending a minimum of $200 - $500 to have a lawyer write the
contract. You could get a boiler plate contract from some sources, but you
should still have a lawyer review and edit it to make sure it will protect you.


Second, make sure to have a statement of work in the contract. This is an
attachment to the contract which states exactly what the sub will do. This way,
if the sub does not do his/her work, you can term the contract and not pay them.
Without a statement of work, you can get dragged into war with subs who feel
their work was good but did not meet the client's needs. You also could wind up
paying for work that sucked.

Lastly, at the end of the year you must file a form 1099 and form 1098 with the
IRS and your state revenue department (if you have one) stating how much money
you paid all your subs. If you do not contract the subs properly, YOU become
liable for their taxes if they do not pay them. This means the feds will come
after YOU for the money and YOU will have to pay it. Which means the job could
wind up costing you everything you earned and then some.

Furthermore, and take this from a subcontractor who has been burned more than
once, I would never 1099 subcontract a person who does not have experience as a
contractor. I can tell you countless stories of people farming out work to
inexperienced contractors and then getting stuck with a huge tax bill because
the subs tried to get away without paying taxes. Unfortunately, there are a lot
of people out there who simply do not understand what contracting is all about.
They get dollar signs in their eyes and forget to pay their taxes.

Worse, you could end up holding the bag for some lazy jerk who becomes convinced
he/she is an employee and deserves benefits. I know a guy in Seattle who lost
his business and thousands of dollars because he subcontracted a job to some
lazy, whining, creep who sued his client and him for taxes and benefits. The
legal expense and lost work cost this person almost everything.

(plug) You might want to consider finding a smaller, local contract shop or
consulting company to carry your contracts for you. Many of these will carry
all your contracts and do all the paperwork for a small margin. (/plug)

I know it sounds like an easy way to make some extra money, but once you cross
the line of subcontracting work, you enter a whole new world of madness,
management, and taxation hell. You also open yourself up for innumerable legal
troubles. Unless you want to start your own consulting organization or contract
agency, I would not encourage anyone to subcontract work.

Good luck.

Andrew Plato
President / Principal Consultant
Anitian Consulting, Inc.
www.anitian.com





--- Anna Sherman <Annabel138 -at- AOL -dot- COM> wrote:
> Can someone explain the tax implications that arise if I'm contracting for a
> company (getting $x an hour) and I have other writers that I farm work out to
> (at $x-10 or 20 an hour)?
>
> I'd like to not have to worry about helping the people working for me with
> their taxes.
>
> Can someone explain?
>
> Thanks
>
> Anna
>



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