For many small business owners when it comes time to grow one of the questions is do I hire employees, should I just hire subs, or… Needless to say when one starts adding up the cost of Workman’s comp, FICA taxes, etc… subbing it out starts looking more and more attractive. Unfortunately whether it is due to confusion, bad advice, or just trying to cut corners – many will misclassify an employee as an independent contractor. This is one measure that Illinois decided to take action on via 820 ILCS 185 aka the Employee Classification Act.
The Reporting Requirement:
Any contractor who has construction services performed for it by an individual, sole proprietorship or partnership that is not an employee of the contractor must file a report by January 31, 2015 with the Department of Labor. The report must include the following information:
- Your “contractors” name, address, business identification number
- The name, address and business identification number of each entity or person providing services, along with total amount paid for services and materials and equipment during the taxable year
Please note – this does not include corporations*, lumber yards, or anything crazy like that, just ones you generally have to send a 1099 to in most cases.
There are 3 ways to report:
- Simply mail them a copy of your 1099s (which should already be mailed out to everyone by the 31st), or send them a pdf copy electronically
- You can attach a word document or spreadsheet using this page
- or use their special form
* A few gotcha’s:
- The names & business ID’s reported to the department can be released via the Freedom of Information Act. With that, all the other personal information including the amounts paid are not.
- LLC’s & Corporations are generally exempt from being reported but there are certain cases where they don’t qualify (see Is it really a Corporation? below) so you should consult with an accountant or attorney if there is any doubt…
The IRS – Individual or Legitimate Company:
When trying to figure out if an “individual” is really an employee or a company / contractor one generally turns to the IRS. They examine the relationship between the parties specifically looking at the degree of control and independence in said relationship. There are three main categories that they look at; Behavioral Control, Financial Control, and the Relationship of the Parties.
- Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- In many cases this can cause many to go oh-no as we control means, methods, tools used, etc… but one must remember that this is just one of three main items they look at
- Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
- Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
- One big tripping point in this is does the “contractor” only do work for you, or can / do they work for others also
Illinois – Individual or Legitimate Company:
Unlike the IRS, Illinois assumes “An individual performing services for a contractor is deemed to be an employee of the contractor unless it is shown that:
- the individual has been and will continue to be free from control or direction over the performance of the service for the contractor, both under the individual’s contract of service and in fact;
- the service performed by the individual is outside the usual course of services performed by the contractor; and
- the individual is engaged in an independently established trade, occupation, profession or business; or
- the individual is deemed a legitimate sole proprietor or partnership under subsection (c) of this Section.”
If #1 wasn’t exactly a can of worms, Subsection C is where things get tricky as they list 12 items that must be “shown” like offering services to the general public or other contractors, licenses being in the “individuals name”, etc… With that the following three I can see as troublesome; (1) the sole proprietor or partnership is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result; (3) …has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle; (9) …furnishes the tools and equipment necessary to provide the service.
Hmmm is this the death of the legitimate “sole-proprietors” in Illinois – it just might be as many companies may flat out only contract with LLC’s or Corporations.
Illinois – Is it really a Corporation?:
Under the Statue – “Individual performing services” does not include a bona fide corporation nor a limited liability company (LLC). In determining whether a corporation is bona fide for purposes of the Act, the Department shall consider, among other factors, whether:
- the corporation holds itself out as a corporation;
- articles of incorporation have been filed and the corporation is in good standing…
- the corporation employs employees to carry out its corporate purposes and principal activities; and
- the corporation carries appropriate workers’ compensation insurance coverage for its employees and has registered with the Illinois Department of Employment Security for unemployment insurance coverage.
In determining whether an LLC is bona fide for purposes of the Act, the Department shall consider, among other factors, whether:
- the LLC has assets;
- the LLC maintains a company bank account;
- there is an intermingling of company and personal accounts or funds;
- the LLC holds itself out as an LLC;
- the LLC makes necessary tax filings that are current and complete;
- articles of organization have been filed and the LLC is in good standing, in the case of Illinois LLCs, with the Illinois Secretary of State or, in the case of foreign LLCs, as directed by the laws of that jurisdiction;
- the LLC carries out its daily activities in a manner consistent with the operations of an LLC;
- the LLC employs employees to carry out its purposes and principal activities;
- the LLC carries appropriate workers’ compensation insurance coverage for its employees and has registered with the Illinois Department of Employment Security for unemployment insurance coverage
Please note I pared this list down for readability purposes. Unlike the “individual” there seems to be more gray here – for example, nothing says that the LLC has to have employees, but if they do… Time to contact your lawyer or accountant – probably. Don’t forget, the reports are due by the end of January.