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University of Massachusetts Amherst

Family Business Center

Yikes! Do I Really Have to Put My Landscaping Contractor on Payroll?

by Shel Horowitz

There's a new law in Massachusetts that makes it much harder to claim independent contractor relationships. The state, apparently, wants a larger pot of unemployment insurance.

Kris Houghton of FBC sponsor Meyers Brothers Kalicka told the Family Business Center's June gathering all about it.

For federal tax purposes, and -- until the law passed July 19, 2004 -- for the state as well, a worker could be considered an independent contractor if either the duties are outside the company's usual business,or the work is performed off-premises. The new amendment changes the requirement from either to both. And this law has teeth: combined civil and criminal penalties of up to $100,000 and two years in jail. Yikes!

At the federal level, the IRS examines 20 criteria to determine employee or contractor: level of instructions, training requirements, how integral the worker is to the business, whether the helper can delegate, who pays assistants, who sets the hours, whether the worker is paid by assignment or by time period, who invests in and supplies tools and equipment, the right to fire or quit, whether the worker markets the services to and performs them for others, who pays expenses, where the work is performed, whether it's a long-term or full-time relationship, if a routine is mandated, profit potential, and reporting requirements. The federal government classifies certain occupations automatically as employees, even if they meet all the tests: food, beverage, or laundry route drivers, insurance sales agents, b-to-b salespeople. But direct sellers working form home, and real estate agents, are automatically treated as independent contractors. If you've got questions, it's best to check with your business advisors -- or ask the IRS for a determination, using Form SS-8.

Fortunately, you don't have to start filling out W2s for your outside landscaper or cleaning service just yet, even though they're working on your premises. There is a three-test alternative that's much more reasonable. If your helper meets all three, you can still file that delicious 1099 with the state.

  • The service is performed without your control and direction, either oral or written.
  • It is outside your usual course of business.
  • The individual is customarily engaged in this business.

Oh, and even if your business relationship fails this test, you can still file the 1099 if you file one with the feds -- as long as you pay the applicable worker's compensation and unemployment insurance.

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