He's not withholding. Chances are good his workers aren't paying taxes either.
According to the manual the IRS uses to train its worker classification auditors, the three most important factors are:
Instructions to workers: Your worker is probably an employee if you require him or her to follow instructions on when, where, and how work is to be done. This is a very important factor. However, if you tell your electrician you want blue switch plate covers instead of white, you are not exercising control to a degree that would make the person an employee.
Job training: If your company provides or arranges for training of any kind for the worker, this is a sign you expect work to be performed in a certain way; therefore, the worker is your employee. Training can be as informal as requiring the worker to attend meetings or work along with someone who's more experienced.
Worker's ability to make a profit or suffer a loss: An employee may be rewarded, disciplined, demoted, or fired depending on job performance, but only an independent contractor can realize a profit or incur a financial loss from his or her work. In other words, an employee will always get paid; an independent contractor, however, has a
financial stake in his enterprise.
Also:
Importance of the worker's services: If a worker provides services that are integral to the success of your business, the worker is likely your employee.
Personal performance of services: An independent contractor should have the freedom to hire assistants or subcontract work to other workers or firms at his or her expense (this is where profit or loss could enter the picture). If you require the worker to perform the work personally, that's a sign of control and therefore indicative of employee status.
Ouch.
This scheme is going to work until he starts issuing 1099s and the government (maybe after months or years) notices them and goes after the workers for their (extremely expensive) self-employment taxes. Which, because they're probably making the prevailing rate for housekeepers (high teens per hour) is going to threaten to drive them into bankruptcy and thus cause a stink.
You are correct that the maids are employees, but since he only just started this business, it seems like a very fixable problem to convert them to employees.
I ran some numbers on a free paycheck calculator site (paycheckcity.com) and assuming the following: Washington DC, wage of $20/hr, 30 hrs/week, married (2 exemptions), the numbers come out to:
Weekly Gross Pay $600.00
Federal Withholding $29.81
Social Security $25.20
Medicare $8.70
Washington DC (ouch) $28.00
---
Net Pay $508.29
So, he might need to set aside $100/employee/week.. The taxes aren't necessarily a business-killer.
If his current employees are 1099, they're paying SECA, and the numbers are 2x this. If he switches to W2, he'll pay half of FICA, and the workers the other half... but now his job offer is significantly less attractive.
He also owes $187/yr for uninsurance per employee.
Dealbreaker? No idea. Obviously people do make a living running housekeeping services.
Hi i'm only in a few months, none of this is a deal breaker. I've made mistakes along the way, but I think everything is fixable, luckily I'm not in year 6 or something lol
You're forgetting workers' comp, which can be very expensive for this particular type of business. I'm in the industry, and can tell you from experience that it can cost between 20 - 25% of a workers' gross pay. There goes his profit margin.
How can it cost that much? I pay something like $500 a year for my own workers compensation insurance, because it is required by New Jersey. $10/week is peanuts.
Edit: I'm not calling you a liar, just genuinely curious.
The cost of workers comp is determined by the type of labor involved. Maids work with potentially hazardous chemicals, are doing physical labor all day long, and also drive a lot from job to job. This makes them substantially more expensive to cover, compared to a clerical employee.
Do you work for a cleaning service? Cleaning services pay anomalously high worker's comp insurance rates (though I too was surprised to hear that it might be 20%).
I did about 10 minutes of googling since it is my lunch break, and I'm now convinced that your risk rate will only be 20% if you are something like a logger or speedboat racer.
From '_sentient: Car accidents. If you get in a terrible accident on your way from one job to another, that's coverable, and exposes the worker's comp insurer to potentially unbounded liability. It makes more sense now.
According to the manual the IRS uses to train its worker classification auditors, the three most important factors are:
Instructions to workers: Your worker is probably an employee if you require him or her to follow instructions on when, where, and how work is to be done. This is a very important factor. However, if you tell your electrician you want blue switch plate covers instead of white, you are not exercising control to a degree that would make the person an employee.
Job training: If your company provides or arranges for training of any kind for the worker, this is a sign you expect work to be performed in a certain way; therefore, the worker is your employee. Training can be as informal as requiring the worker to attend meetings or work along with someone who's more experienced.
Worker's ability to make a profit or suffer a loss: An employee may be rewarded, disciplined, demoted, or fired depending on job performance, but only an independent contractor can realize a profit or incur a financial loss from his or her work. In other words, an employee will always get paid; an independent contractor, however, has a financial stake in his enterprise.
Also:
Importance of the worker's services: If a worker provides services that are integral to the success of your business, the worker is likely your employee.
Personal performance of services: An independent contractor should have the freedom to hire assistants or subcontract work to other workers or firms at his or her expense (this is where profit or loss could enter the picture). If you require the worker to perform the work personally, that's a sign of control and therefore indicative of employee status.
Ouch.
This scheme is going to work until he starts issuing 1099s and the government (maybe after months or years) notices them and goes after the workers for their (extremely expensive) self-employment taxes. Which, because they're probably making the prevailing rate for housekeepers (high teens per hour) is going to threaten to drive them into bankruptcy and thus cause a stink.