Transcript below:
Aaron (00:01):
Aaron Levine, LG insurance. And we are here with, uh, with our podcast and insurance. And I’ve got a special guest with us today for a frequent question that we keep getting, um, from business owners, business owners always want to know if I 1099, my employees do I really need workers’ compensation. So we figured we’d bring in an expert on the other side of the coin and kind of dive into the tax side of it. I’ve got Kevin Muldowney from David Muldowney, Jr. CPA out of Colts Neck and Little Silver and his class today. Kevin, how are you?
KM (00:33):
I’m good. I’m good. Doing well. Tell us a little bit about your business. Sure. So, um, the business, as it is today has been in existence since 2002 in the Caltech location. We just recently acquired a firm in little silver. So thank you for mentioning that. And it, it nearly doubles the amount of clients that we’re able to help as well as staff members as well go. Hawks, M U MBA. Yes. Yes. Hawks Hawks double time because St. Joe’s where the Hawks, that was my underground and undergrad and, and mom at the university are also the Hawks. That’s all is my MBA.
Aaron (01:12):
So the whole, the whole point of us being here is we want to get into a deep dive of a topic. We don’t want to go so deep that we’re going to bore everybody to death, but we want to get into this a little bit. I want to get into some of the psychology. Why are people doing things? But when I get that question, a cringe, because you still need workers’ comp even regardless of how you’re paying them, but is an employer doing it right or wrong when they say that and they use this term, I’m 10 99 in my employees, right? You commented on an Instagram post. What I, I used that phrase 10 99 in my employees and all their non-employees at their 10 90 nines. So give me some of the background on the IRS stipulations and what, what defines an employee.
KM (01:58):
Sure. And I’m, I, I smart when you, uh, when you mentioned that at the, at the outset, during your intro, because if you’re a 10 99, you’re not an employee. I also like when people use my W2 contractors, because that too is an oxymoron. So it’s a common question that we get as well, whether somebody should be an employee or whether they can just 10 99, them as a contractor. And the IRS does have specific rules on that. And it’s mostly about control. Do you control what they do? You control how they do it. You control when they do it. So those are, those are basically the criteria, as far as determining whether somebody is an employee or an independent contractor,
Aaron (02:39):
What are the tax benefits? Right? Why do I want to W2 somebody? Why do I want a 10 99 somebody? What’s the difference? What am I getting out of it from an employer or having a 10 99 versus a W2.
KM (02:51):
So as a 10 99 contractor, let’s, let’s make sure we get that very abundantly clear. Should we be here all day? If you bring somebody on as a contractor, you don’t have to cover them in benefits. You basically don’t have to provide a workstation for them. You’re saving on the employment taxes. So as an employee, the employer withhold social security, Medicare, and then they also match it when they make that deposit with the IRS. So if somebody is a contractor, you’re not paying that matching portion of social security, Medicare that’s on them. Um, benefits is, is the biggest one. So you don’t have to provide a 401k match. You don’t provide health insurance if you’re required to do so, worker’s compensation. And we’ll let, we’ll let you so
Aaron (03:46):
Qualifies as, as a contractor. So take my business as an insurance agency owner, all of, most of my staff, all of my staff, all of my staff is a W2. And then I have a couple of independent contractors who write their own path and I pay them on a 10 99 basis. I don’t give them instructions on what to do, how to do it. They bring business in, we write it, we quote it, we sell it, we service it and then they’re on their own. Right. Am I doing it right? Yes. Okay. So if I bring in another sales person and I want to give him more direction, provide them leads, provide them a workstation, make them work on my terms on my hours. But they’re a producer because they’re commission based. Are they a w should they be a W2? Or should they be 10 99?
KM (04:34):
The way you just described sounds more like a W2. You’re controlling what they do. They’re working for you. They’re selling policies under LG insurance. You’re providing a workstation they’re reporting directly to you. So
Aaron (04:49):
Its owners are control freaks. That’s why we own businesses. So why don’t we want to W2 everybody so we can just control them, or we just want to control them and not pay the taxes on them,
KM (05:01):
The tax savings and the benefits. That’s, that’s the biggest thing. And also, you know, if, if you we’ve worked together, we’ve come in, we’ve done your accounting work. Um, but you don’t necessarily control how we do it. Now. We, you don’t control when we do it. You know, we, if, if it works into our schedule, then that that’s when we’ll come. If we have other appointments that day, then it doesn’t fit with us. Then we’ll have to schedule obviously a different day. Whereas if we were an employee of yours, you would say, you have to be here nine to five. And part of your job would be to balance the books and do the bank rec and pay the bills and stuff much work for you. Right? Exactly.
Aaron (05:42):
When it comes to worker’s comp, this is where we, you know, where the stickiness comes in 10 99 versus W2. And I just had this the other day with not even somebody swinging hammers. Cause we often see it with people that swing hammers and do dangerous stuff for limit living like climb on roofs and do construction work. We had a smaller business, you know, had a little bit of W2, a little bit of 10 99. It’s I got the, they work from home. They’re not going to get hurt, you know, and I’ve got this 20, 20 workers’ compensation Almanac from applied underwriters. Thank you. Apply. That’s the only plug I’m giving today. Um, I get this book every year and it’s got all sorts of great data and statistics, all state-based stuff. They actually put a chapter in this about working from home this year, um, because of the current situation.
Aaron (06:29):
Sure. You know, so we still need to, by law have workers compensation for our employees and our 10 90 nines. So we always think we need it for our W2’s, but we also need that worker’s compensation insurance for our 10 90 nines. And if we send a 10 99 and we don’t collect the workers’ comp we’ll guess what? We, as the business owner, you as a business owner, then become liable for that workers’ compensation insurance coverage. So it’s a misnomer that people think that because they’re 10 99, they don’t need to be responsible for insurance. But if we go back to the swinging hammers analogy, I’m a general contractor. I hire a roofer roofer. Doesn’t have workers’ compensation, insurance roofer falls off that roof, roofer Sue’s general contractor and homeowner business owner, all because of it. And everybody gets tied into this nasty little, uh, web of, of not having insurance and the general contractor winds up being the one that’s on the hook. So collecting insurance from those who have it is super important. And then also covering those that don’t have, it is going to be a responsibility also when people fall into that trap and try to get away with saving some money on their insurance premiums. But it’s, it’s written out in each state as part of the law with respect to the workers’ compensation. So it’s, it’s super important that everybody has it. Now, one other question, if the IRS finds out that you’re misclassifying staff, is there a penalty?
KM (07:58):
So they, you will be due for back any back payroll taxes, plus interest, less interest and penalties. And yes. So, so there is, um, in New Jersey rules are, are a little bit different. They add kind of a next tier to it. And that criteria is if you’re doing it for somebody else as well, or a lot of times, we’ll, we’ll see clients that get notices about, you know, random DOL department of labor audits looking for specifically that looking for the misclassification of employees. And what they’ll ask for is copies of letterhead, copies of business cards, copies of back in the day, yellow page ads, um, just to make sure that you’re doing this service for other people as well, that you have your own business, they went as far as saying, as developing percentage of your revenue. I believe they set it at 72% of 72% or more of your revenue came from one client. Then you could be deemed an employee of that client because it doesn’t show diversity of income. And it shows that you’re pretty much under the control of that person.
Aaron (09:15):
So how do you advise somebody starting a new business when they come to you and ask, how should I pay people? What’s your, what’s your advice?
KM (09:24):
What’s what are they going to be doing? If they are really good as a book you’re like, or when it comes to that, because I mean, the penalties and interest are the things you don’t want to pay. Right? You know, if you can avoid all those, you’re going to be paying the tax regardless. So if you can avoid the penalties and interest, that’s, that’s the key part. And cause it’s not always just on you because when you issue a 10 99 to that contractor, and they’re not really a contractor, that person that received the 10 99 is now on the hook for both sides of that employment tax
Aaron (10:03):
Person that received the 10 99. Yes.
KM (10:06):
Is now on the hook for self-employment tax lawyer, if it’s, if it’s accurate. Yes. So if you have somebody who wasn’t made aware of that if you have that contractor who should have been an employee, but now they have a 15.3% additional tax that they have to pay come April. They’re not going to be too happy. Why
Aaron (10:32):
An employee, independent contractor, except an employer paying them on a 10 99 versus a W2. Like why do people think that better?
KM (10:45):
Um, cause they can write off all this stuff. Even though many times, these people that should be employees don’t really have any many write-offs, you know, they go to their job and then they go home, you know, they don’t necessarily have any expenses.
Aaron (10:59):
We’ve, we’ve run into the issue and I’ve been called Erin, can I have some advice on? And I’m like, Oh boy, here we go. Um, you know, an employee who is being 10 99, who then starts up their own business so that they can accept a 10 99 and then have more write-offs. And it just, it seems like it just continues to go down a rabbit hole. It definitely, definitely could. You know, because if you’re not working for more multiple contractors, if you don’t have multiple sources of income revenue for your business, whether it be a sole proprietorship or whatever, you know, it, it seems to just get muddy. It could,
KM (11:38):
It definitely could. Um, especially if it’s we see it a lot, when it’s the younger people, they’re just coming home from school, they’re working in the summer and you know, maybe their employer doesn’t want to put them on payroll, go through the, of adding all that stuff and paying the tax tags. Second. It does take 90 seconds. I agree. I’ve done it. Um, so maybe that, that could be the reason why, but now that college student is hit with that additional tax without any write-offs. So it’s you’re right. It goes down the down the rabbit hole.
Aaron (12:14):
I’m going to shift, we’re going to go down another quick rabbit hole here. And this is very selfish of me, but because we’re on the topic of workers’ compensation, we always run into an, a major issue with an insured, uh, recently with respect to them, changing from an LLC to a C corporation, uh, by advice of their accountant, not Muldowney CPA, by the way. Um, they were given some poor advice. They switched from an LLC where the two owners were excluded to then a C Corp where within a C corporation you’re required by law that include the officers are also included in the workers’ compensation. Um, and they were in a higher risk category. So the additional cost of insurance was about $8,000 a year. And they still thought by way of their accountant, whoever was giving them this advice, they were going to be able to then still waive off of workers’ comp as the owners. Why would somebody switch from an LLC to a C Corp? What’s the tax advantage? Like, you know, what do I get from doing that to myself?
KM (13:17):
So as an LLC, you can choose to be taxed as if there’s multiple members as a partnership as a C Corp, or you can elect to, to choose S Corp status. Um, yeah, there’s this, uh, another, an additional form that you have to file to choose S-corp status this, not just automatic, but to go from a partnership to a C Corp you’re saving on self-employment tax. So everything that flows through as a partnership to your personal return is subject to self-employment tax, barring some exceptions and some additional deductions. But for the most part, generally speaking, it’s all subject to self-employment tax. As a corporation, as an officer of a corporation, you are now required to be on payroll. So the only thing that is subject to employment taxes is your wages. So anything additional can be taken as a dividend. Yeah. That’s basically it just as a dividend for additional,
Aaron (14:23):
Well, you’ve seen my books. Do I want to switch from an LLC to a C Corp?
KM (14:27):
A S-corp is actually from a tax perspective, is, is most beneficial of God already. Yes. Um, so you’ve heard of, I’m sure many people that are in business and do business for themselves ever heard of double taxation. And that’s what happens with a C Corp. So you take your wages and they’re subject to tax. And then any additional earnings that you take out of the business are deemed dividends are not a deduction to the corporation, but are taxable to the shareholder. So there’s your, there’s your double taxation that you’ve heard about it. So depending on the size of your business, depending on certain other factors, it’s not all in a vacuum C Corp could be the way to go, or you may want to choose to be an S Corp.
Aaron (15:11):
So the moral of the story is speak to your professionals. Before you do anything before you start a business, before you start your payroll, before you start operating, well, go ahead and operate and fix it later. But before you establish yourself as any type of corporation, um, or for you set up your workers’ compensation, it’s always good to get the advice of a professional of a CPA like David Muldowney, junior CPA from Kevin and your insurance professional, right? Speak to your lawyer, speak to your accountant, speak to your insurance guy, um, is really the moral of the story. Before you take any actions that could be detrimental to your business into yourself. Um, it’s good to know because accountants don’t have all the insurance answers. The insurance guy definitely doesn’t have the tax answers and, and the lawyer kind of sits in the middle there also, right?
Aaron (16:00):
So having the three professionals at, at your, at your, at your hands at your ability to use, um, is super important. You know, Kevin and I have a lawyer that we both speak to, um, in one of our networking groups and we get great advice. And when we all work together, we can help, you know, many small businesses, any business owner out and really creating a, a good solid structure for them. So do you have any other thoughts or questions you want to share? Not at the moment. No, I thank you, Kevin. I appreciate you coming down today and, uh, we’ll look for.
