Photo by Quazie on Flickr.com
I was talking with a small business owner the other day and she told me this story:
I have a friend who’s really hurting. She lost her job about six months ago and she just can’t make ends meet. She’s having a hard time even putting food on the table. I wanted to help her out so I had her come help me with a project at my business and I paid her under the table. The thing is, she really did a good job and I could really use some more help but I can’t afford to pay her under the table any more.
Let me make one thing perfectly clear: Never pay anybody under the table!
First, it will come back to bite you in the behind one way or another. Trust me, I do a lot of audit work. “Under the table” doesn’t help anybody. You don’t get a deduction for paying “under the table” and the person you paid can wind up getting audited and get stuck paying tax on that money anyway. It’s a lose/lose situation.
If you really want to help someone out, but you can’t officially give them a payroll job, hire them as a contractor. Do the whole thing, have them fill out a W-9 form, and explain that you’re hiring them as contract labor. Tell them they’ll have to pay taxes on the money: 13.3% for self employment tax plus any additional income tax for their tax bracket.
Hiring someone as a contractor gives you a “triple good” effect. First, by making your friend contract labor, you can write off the money you give her as a tax deductible expense. If you’re paying 40% on your self-employment income, that $100 you pay is really only costing you $60. Plus, you’re getting a benefit out of it too because you’re getting the benefit of her labor. And third, your friend has a job. It might not be a full time job, it might not pay all the bills, but it’s something to put on the resume to show that she’s working. News reports are saying that employers won’t hire someone who has been out of work for over six months. That contract labor job gives her a better chance at finding real work. Plus, it allows her to use you as a reference. (Okay, I guess that makes it four benefits, not three. That sort of makes me the accountant who can’t count. Maybe I should hire someone to help me with that.)
But what about all the reporting requirements? With contract labor, all you have to do is prepare a 1099, which is due in January. You can get the forms free from the IRS. It’s easy. You only have to submit 1099s if you pay someone over $600 so if you’re just helping someone a little, you don’t even have to worry about that. I’ll make a how-to post in late December, so you can do it yourself. (My fiendish plan to get people to come back to my blog.)
What about all the new tax incentives for hiring that the president has proposed? So what about them? Right now, that’s all they are—proposals. Congress may or may not pass some or all of them. We have to run our businesses and our lives in the present tense. I’ve tried waiting for Congress to pass bills before—it’s bad business. Hiring someone as contract labor is a good quick fix for your staffing problems and it’s a good quick fix for someone who may need to eat.
Who knows? Maybe that contract laborer you hire will be the key to you making big profits.
Hi Samiam,
I think your best bet is to contact a local attorney. I’m sorry but I don’t know what you can do. Good luck!
I ex is working under the table as a labor in ma. He does not pay support he owes back pay but it’s exp. I thought all roffing company’s had to pay insurance
Compensation and taxes he gets paid cash full time no benifits I called his boss who happens to be his 2nd cousin and said do you plan on garnishing his pay and he first replied he doesn’t work for me. Then he said he does but I need to go on welfare then they can get the child support! I am absolutely just disgusted any input that may help me would be great thank you.
Marc,
You raise some really good issues. First, can a non-profit use contract labor? The answer is yes–but what you said about your volunteers being there daily for up to 8 hours does raise a red flag that I don’t think you want to raise.
Although hiring contract labor is perfectly acceptable, if you have contract laborers who are there every day for 8 hours a day, then you run the risk of shirking your responsibility as an employer. There’s a big push by the IRS right now to make sure that employers are paying their payroll taxes. You don’t pay FICA on contract labor, but if you’ve got someone working for you on a daily basis for 8 hours a day, and you direct their work, then they’re not really contract labor–they’re employees. You don’t want to run afoul of the IRS in that regard.
It’s not the same as getting paid, but maybe you could find ways to reward your volunteers in other ways–like paying for their lunch, or a volunteer appreciation event, or prizes. (I’m shooting from the hip there so sorry if those ideas sound lame, I don’t know the whole situation.) But the point is, you keep the integity of having your people be volunteers and don’t have to deal with the IRS payroll tax issues.
I am involved with a well known non-profit in Ca. We have an all volunteer staff that works for tips only. I am trying to get these people paid with out raising flags. Can a Non-profit / charitable org use contact labor ? these peopleare here daily up to 8hrs.
thanks