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Friday, November 28, 2014

Question

I need to be affordably insured and bonded. In trying to do so, I'm running into many technical brick walls. The insurance laws in Georgia have changed. My cleaning company doesn't intend to go the employee route, but instead use subcontractors. We call our simplifying of the business process, "employee responsibility". However, subcontractors will be treated as employees for the most part, which will require a number of insurance requirements that makes starting the business unaffordable... Is there any way around this?


Answer

Whoa! Before you make another move, get on the IRS website at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html and read that page and all the related links, such as the one discussing self-employment and what constitutes an independent contractor.
Why? Because the IRS looks critically at misclassification of workers and has stiff penalties for the company caught doing so. When you say that your “subcontractors will be treated as employees for the most part”, what you really mean is that they will not qualify as independent subcontractors, but are really, in the eyes of the IRS, employees.
One of the basic differences is that qualified subs are true independents. They are subject to self-employment tax, and may not be treated as employees, who you tell what to do, when to do it, how it will be done, and supply the equipment and means for accomplishing the result. Once you treat them as employees, they are employees, no matter what fancy title is used, including “takers of employee responsibility”.
Moving in this direction will not simplify your business and save you money in the long run. It will make you an outlaw in the cleaning community, and once you are found out by other legitimate contractors (who have everything to gain by reporting your poor judgment to the IRS) or by your clients (who are at risk because you don’t have worker’s comp., do withholding for S.S. or taxes, or carry liability insurance) you will be out of business and possibly facing serious debt. One accident on the job by one of your uninsured “subcontractors” could bury you.
Your liability insurance will probably assume a minimum payroll of X dollars whether you now have that high a labor outgo or not. Some small jobs will not require the insurance and you can be “self-insured” without too much risk. However, the insurance is needed for the big losses you can’t handle by yourself. While you can easily replace a broken mirror or even a computer monitor out-of-pocket, a major loss would put you out of business. While I question the value of bonding, performance or otherwise, some clients will require liability insurance and you won’t get the job without it.
It is very risky to go without coverage and there is no way an “independent contractor” working for you for 6 hours a night is going to afford a $1,000,000 liability policy. In the event of an incident, you will find yourself in a very difficult situation and all your assets can be at risk.
In short, if you are going into the cleaning business or any contracting endeavor, use good business judgment and set it up as it should be. The money saving route you are contemplating is a business mistake with serious implications. Do it right or don’t do it at all.

Lynn E. Krafft, ICAN/ATEX Editor
lekrafft@juno.com