ChildCare Conversations with Kate and Carrie

Episode 173: Should staff members be classified as employees or independent contractors?

October 24, 2023 Carrie Casey and Kate Woodward Young
ChildCare Conversations with Kate and Carrie
Episode 173: Should staff members be classified as employees or independent contractors?
Show Notes Transcript

In this podcast episode, Kate and Carrie discuss the critical differences between employees and independent contractors, emphasizing the importance of correct classification to avoid legal issues. They provide examples of situations for each classification and discuss the potential consequences of misclassification, including penalties and fines. They also offer advice on how to handle misclassification and stress the importance of understanding IRS guidelines. 

Carrie and Kate guide how to approach difficult conversations with business owners or boards about misclassification. We urge you to share the episode to help others avoid legal complications.

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Marie (00:00:01) (-) - Welcome to childcare conversations with Kate and Carrie.

Speaker (00:00:05) (-) - Okay, Carrie, today's the day we are going to talk about whether or not those staff are really staff or if they're independent contractors, whether or not they should be getting a 1099. It's the end of the year. How are you covering your assets?

Speaker - (Well,) - I cover mine by making sure anybody who I'm paying as a 1099 also works for other people.

Speaker - (Wait) - wait wait. Okay, wait what? I can't just pay them a 1099 because that's how I want to pay them and don't want to pay all those stupid taxes.

Speaker 0 (No,) - I mean, the reason we're having this conversation, listeners, is that we've had a couple of people reach out to us over the past month or so asking, what are the pros and cons of considering somebody to be a contractor or to be an employee? And Kate and I have a knee jerk reaction, which is they're all employees.

Speaker - (That) - is, our employees mean, why can't I just pay them as a 1099? I don't understand

Speaker - (because) - you don't want to get crosswise with the IRS, because the IRS can seize all the money in your bank account any time they want to.

Speaker (00:01:16) (-) - I mean, that's that's the basic answer is because you need money in your bank account in order to continue to operate. That is that's the basic answer, but mean, yeah, we want to walk through it. For folks who haven't been around self-employed and entrepreneur people their whole life. Um, because there are times when you do hire people who are contractors, like your plumber is an independent contractor, right? But what what makes him an independent contractor versus an employee? Can you have an employee who is a plumber?

Speaker - (Okay.) - So let's, let's, let's, let's, let's back up. I think we both have tried, but we both keep going straight into wanting to answer the question. And so like Carrie said, we've had several directors and owners who are trying to make their staff 1099 which basically means that the, the, the employee pays their taxes. So if when you hire somebody, you have asked for all of their information and you've had them fill out a

Speaker like (a) - W-4 or a W9 when you go to work for somebody and if you fill out a W9, then the person you're going to work for is treating you as a contractor.

Speaker (00:02:43) (-) - If you fill out a W-4, they're treating you like an employee. So so depends which form. So as a director, if you have people filling out a W-4, they are expecting to be treated like an employee if you're an owner.

Speaker - (So) - okay then that what you're telling everybody is to just give everybody the W9 and then they don't have to pay taxes. Is that is that what you're telling them, Kate?

Speaker - (Um,) - yeah. No, there's a whole lot more to it. So there's actually mean we could make this a really short like podcast and say, okay, so everybody Google this IRS contractor checklist. And if you have employees that don't meet the contractor, okay, they're not employee employee,

Speaker - (Let's) - say people who work for you because work for you use the word employee than they are an employee. It's kind of like in Texas, if you call somebody your spouse, they are now your spouse.

Speaker - (Okay.) - So let's talk that through. So somebody who works for you, some of the basics.

Speaker (00:03:47) (-) - And like said, if you Google you can pull up a real check list. But if you tell somebody what time to be there, what they're going to do, and you provide all of the materials, how they need to do the job, they are no longer mean right then and there. They're not a contractor.

Speaker - (Yeah.) -

Speaker - (Even) - if they work in multiple locations. So the other one is do they have more than one client. So if you are their only client. So in other words, somebody who works for you works for you for 30 or 40 hours a week. They don't work for another childcare center. They don't even kind of do what they do for you anywhere else. This is an employee. This is not a contractor. Now, Carrie, there are people in addition to the plumber who might come and provide some daily services, who absolutely would be a contractor.

Speaker - (So) - who might be that example? So if you hire Kateri to come in as a consultant or a coach or a trainer, we are coming in as contractors.

Speaker (00:04:47) (-) - We're bringing our own supplies. We're setting up the time. You're giving us a topic, but you're not telling us how to train or coach on that topic. Um, so we have some parameters. But we get to decide how we meet them. So trainers are a good example. Cowgirl Sue. She's probably not in business anymore, but I used to have a contractor who came in once a week and did music lessons with my kids, and her name was cowgirl Sue and she was a contractor. We gave her two options of times. She selected the time that would work, and that was the time she came every week. We didn't tell her what she needed to cover. We did tell her what themes we were going to be learning about in the program. But if she chose to not use any songs that had to do with that, that was up to her. Um, so cowgirl Sue or somebody who comes in to do Spanish lessons or gymnastics or martial arts or soccer shots or something like that, those are all contractors.

Speaker (00:05:51) (-) - Most of the people doing repairs on your building are probably contractors. Okay. Well, substitutes. That's where we get into the gray area is substitutes,

Speaker - (But) - we still have I mean, we do have a lot of childcare centers that try to save money and will try and often do pay people as a 1099. And I'm sitting here because not only is this terribly illegal, when you're the person working for you who thinks they're an employee, goes to do their taxes, at the end of the year, they get a 1099 from you, and they go to do their taxes, and all of a sudden they realize that they owe money. You have now made a very, very, very angry human who, you know, could report you. And if they choose to do that, Carrie, you mentioned it already. What happens if they report you to the IRS?

Speaker - (I) - mean, there's a long list of possible things that could happen. I gave the worst case scenario, which is that they seize your bank accounts before that happens.

Speaker (00:06:54) (-) - Usually they send you a letter and another letter and another letter and another letter, but they only have to notify you once. And they say, hey, we have a report that you may have violated XYZ statute or rule, and please respond back in this way in this amount of time. And people ignore it because they're like, oh, I never did that. I haven't broken any laws and they ignore it. And then if you did not respond in the appropriate time frame, then you get fines and penalties. And the reason you're getting fines and penalties is because if they were your employee, you were supposed to be paying payroll taxes for them. And so they now have an account saying that this person was paid $12,000. That means you should have withheld taxes and matched taxes. So that's, you know, whatever it is, $2,000 for that person and they're going to backdate it to the first date that they have that that person worked for you. And so every month or week, however, your tax reporting is I don't want to get into that.

Speaker (00:08:13) (-) - But anyway, every time you were supposed to have paid a tax, there is a penalty for not having paid the tax for that person, and then there can be fines on top of that. So very quickly, that $2,000 of savings and not having to pay that person's payroll taxes pretty quickly can become $6,000 that you owe the IRS. And that will continue to grow day after day after day until you get it resolved. And if they're not answering, they'll just still they'll just take the money out of your account.

Speaker - (Absolutely.) - And the IRS can do that. And if you're not sure, ask anybody who didn't pay their child support and had to have their child their their tax returns garnished, it doesn't really take much for the IRS to figure out how to get to your bank account. So okay, so let's just say you're listening to us right now and you realize that maybe for the last year, six months, even if it was a month you've been doing this, what should you do?

Speaker if (where) - is that line? I think we haven't really explained where the line is between the person who comes in and does gymnastics and the the teacher.

Speaker (00:09:21) (-) - Is there a point in between there where somebody is still a contractor? We haven't gone over the, the the tests. All right.

Speaker - (So) - let's let's talk the test. Carrie, I think you pulled up a checklist. So what is and where did you pull up the checklist. So if somebody wants to and we'll try to make sure that we put it in today's call notes or at least a link to it.

Speaker - (The) - IRS 20 point checklist for Independent contractors. There you go. Um, so there's 20 of them. We're not going to go through every single one of them because that's going to be really boring. But the question, the first question I have. Is, do you have as the boss the right to fire that person? If you have the right to fire that person, they are an employee. If you can't fire them, they are a contractor. So you don't get to fire a certain coach with soccer shots, right? You can just say, can we get a different coach? Because that one doesn't work very well for us, and then they'll rotate out a different coach.

Speaker (00:10:24) (-) - Right. Um, expenses. Does the business pay the expenses for the worker or the businesses business or travel costs?

Speaker - (Okay.) - Okay. So have an I have a great example for that one. Did you pay it all for the first aid CPR background check of the person who is coming into your program to work?

Speaker - (Yep.) - Um, another one is do you set the workers hours? Do you, as the boss, set the workers hours? If you set the hours, they are an employee, not a contractor.

Speaker - (Yep.) - Okay, so what if we needed them for, like, a month or two? Like they're just coming in because it's Christmas and several of my staff are gone.

Speaker - (Did) - you tell them what time to come to work?

Speaker - (Yeah.) -

Speaker - (If) - you told them what time to come to work, then they are an employee.

Speaker - (Okay.) -

Speaker - (So) - if you put them on the schedule, they are an employee. Um, if you are going through some sort of employment agency, then they're a contractor.

Speaker (00:11:30) (-) - And you tell the employment agency I need them here between 7:00 and 730 is the start time, and the end time is between 4 and 6. So if you're working with

Speaker - (but) - with working with an employment agency you've hired, you've contracted with the employment agency. So you're paying them. And chances are they are paying the person who's coming to work for you as an employee.

Speaker - (Correct.) - But again, so that's so if you're using an employment agency or a substitute service, this is the only way around that whole I told them when to come. So they are my employer. If you went through an employment agency then they can still be a contractor. If you did not go through an agency, they are your employee. If you told them when to come and when to leave and when their lunch break was, um, let's see, what was another one? Training do you train the worker or do to do the job in a particular way, or are they already trained? So if you did their pre-service, if you did their orientation, if you did their first aid, CPR, any of that, they are employees, okay.

Speaker (00:12:39) (-) - So the other thing to think about with that is have you also required them to sign any sort of I'm going to call it a nondisclosure or anything like let's just say. So I have worked with after school programs that provided a learning opportunity for youth who would feel that their information was proprietary. So in other words, their curriculum was their curriculum. And so they actually had their instructors Who. Probably only taught for them a couple of days a week, actually sign non-compete disclosures. And they did them as very generic off the internet. So it came across to the people who were teaching that they were no longer allowed to teach this topic anywhere within, you know, 15 miles. Now, had anybody looked at that agreement, they could have seen that it was that curriculum specifically. But that's not how people interpreted it. So all of a sudden, we have people who are working two days a week and are told they can't teach anywhere else because they've had to sign a non-compete.

Speaker - (Yeah,) - mean that's another one of the tests.

Speaker (00:13:51) (-) - Another one is, um, is the work performed on your premises? So can they provide the childcare somewhere else? Probably not. Again, they're going to come back to employee. So I think we've we've talked enough hopefully hopefully we've explained this well enough. Yes. You could save money if during the probationary period you paid somebody as a contractor, however, you would be breaking the law if you did that.

Speaker - (Okay.) - So so so let's jump. So I think we've we've set the stage, but I do want to provide a potential way for them to help themselves because I'm going to say it. If you've realized you're listening to us, we're talking about this and you are sitting here going, okay, yeah, I'm guilty of that. Yeah, I've done that. I don't do it anymore, but I've done it in the past. Or maybe I still do that with my summer people or whatever. If you haven't figured out it's the IRS, so it's probably better for you to come clean to them and be prepared for the hit.

Speaker (00:14:59) (-) - Verses them coming to you because you made somebody mad. And you know, if you are filing for, you know, if you have somebody who left your program, who three months, four months down the road gets laid off and they go to file unemployment and they list you as one of their employers. You've also now raised the red flag at TWC because they don't have you in their system as an employer.

Speaker - (Yeah.) - Mean. And again, it might not be the current director who did this. It might be that you come in as the new director and you're told this is the way it's done. And you're like, I just listen to Carrie and Kate and that is not cool. So you've now got to have. So how do you have that conversation? How would we advise our directors to have that conversation with their owners? Because the owner is like, no, this is what we've always done. And you now know that that is fraud and you don't want to be party to fraud.

Speaker (00:15:58) (-) - So how do they have that conversation with the owner or the board who tells them, no, this is the way we do it. We always run our after program this way or our summer program or whatever it is.

Speaker - (So) - how do they have sensation? Those are that's a that's a great point, Carrie. How do you have a difficult conversation? Because this is going to be a difficult one. And so the first and easy thing is, is does the program or the business have an accountant or a bookkeeper? Because if there's an accountant or bookkeeper already in place, this is really easy because you can pass the buck to them, because there is not an accountant or a bookkeeper who is going to not tell the owner that what they're doing is against the law.

Speaker - (Oh,) - bet there are. Al Capone had bookkeeper there. Okay, well, and what if the program doesn't? What if they're just using QuickBooks?

Speaker - (Okay.) - So if they are so if they're not using a professional service then it is definitely go do your own research okay.

Speaker (00:16:57) (-) - So if you're a director make sure you do the research other than Kate and Carrie. So go to the Irs.gov and look for the contractor versus employee documents. There are all kinds of brochures. Find them. Go check with human resource management organizations. They have national associations. Do what you need to do so that you've got not Kate and Carrie. But that you have some additional information going in with you. Sit down, have the conversation, ask a little bit of history about how they set up their employee payroll and because, again, chances are your owner thinks he's paying them correctly and that they aren't doing anything illegal. Most people don't go out of their way to commit fraud. What they see is this is a lot of money, and that matching those taxes is a lot of money. And maybe they think, oh, well, I can pay people more. More money can pay them a higher rate, and I'll just give them a 1099. So again, that's where you have to make sure that you're going in well prepared and that you can answer the questions.

Speaker (00:18:03) (-) - So not only have a conversation and ask that history piece, take all of the notes. And if you need to take your time, go back and then schedule a second meeting. Because during the second meeting, once you find all that out, you're going to have to use. Maybe you don't have to use phrases like fraud, but you need to make sure that the owner understands that what you did do was illegal. This is not just best practices, it's illegal. And so they can stop today, make the corrections immediately, and then reach out to the IRS and figure out what they need to do to back pay. Because now, once they're aware of it, you need to make it right or you've got even bigger issues. So you think that the penalties and fees are stiff right now. If you admit that six months ago you paid somebody for a month or you've been paying somebody for six months, if you've been paying people like this for your entire business life, which could be one year, ten years, 15 years, every single one of those people, they're no longer getting paid from you, but you still have to match their tax payment.

Speaker (00:19:12) (-) - And it's only going to take one of all those people to raise that red flag, which will then mean that you no longer just have one person you have to deal with. You now have everybody in the history of your business to deal with as a director. If you are uncomfortable with having this conversation, or you do not like the response that the owner or board gives you, cover your assets and go find a new job because the IRS isn't going to care if you say that wasn't me because or I didn't make that decision. If you're still doing it, you're still guilty. Once you know about it, you are guilty of withholding information and not getting the people to do the right thing.

Speaker - (And) - guess I didn't give the worst case scenario. The worst case scenario is that you can go to jail and you can. Be held financially liable for those taxes if you had a fiduciary responsibility. We're not going to define the term fiduciary responsibility here. Go ahead. Feel free to Google that. We'll try to get somebody on the podcast maybe who can talk about leadership responsibility.

Speaker (00:20:18) (-) - But if you knowingly violated the law when you had a fiduciary responsibility, a financial responsibility to your employees because you have a financial responsibility to your employees to pay their Social Security taxes so that they have Social Security when they retire, that is your responsibility. And if you knowingly don't do it, you can be held criminally and financially liable for doing that. So this is probably a scarier topic than people were like, oh, I want to know whether somebody is a contractor or an employee, but there aren't a whole lot of places where you have a whole lot of liability in early child care. This is not early child care. This is just business. Every business in the United States has the same questions and concerns. Every business in the United States has people they pay as contractors and has people they pay as employees. And figuring out which one somebody is, is a sticky business. So the government is aware of that and they tend to have some leniency. But once you have been notified that you are violating it and you don't try to correct it, they will drop a hammer on you.

Speaker (00:21:35) (-) - Yeah. And so and there's not a oh, well, I only do one of those things because. So Carrie mentioned that 20 point checklist. If they do anything on that 20 point checklist they're an employee. Right. So you know you might not pay for their background check and their fingerprinting, but you tell them when to be there, what to wear and what to do while they're there. They're an employee. Just because you didn't do the one doesn't make them a contractor. So

Speaker - (and) - you know you're requiring all of their work to be done at your premises. Yeah. That makes I mean,

Speaker - (it) - really is pretty simple in the childcare industry as far as I'm concerned, or really any industry. Right. If you give people a schedule of when they have to show up and you tell them what they're supposed to do when they get there, they're employed. If they don't have any other clients, they're an employee, right? So if you have somebody who is a substitute for you, but a substitute for three other programs and she's always a substitute Monday morning, maybe, maybe that's a real that's a really strong maybe because if you get to determine that she doesn't come or she gets to determine she doesn't come, you know, if she can, if she can say, oh, I don't feel like coming today.

Speaker (00:22:50) (-) - It might be poor business practice, but, you know, if every Monday she works at your program and every Tuesday she works at another program, you know, but if we have professionals. Carrie, you mentioned plumbers, but if we have other professionals that come in that we pay to work with our students, they're normally going to be contractors or how is there a fine line with that? How would I determine that?

Speaker - (Are) - you setting their work hours? Are you setting their performance standards and are you able to fire them? There's a difference between firing them and canceling their contract. Um, so if you're if you're like, you have to come every Tuesday and Thursday between 230 and 4:00, that's your hour and a half you've got for the kids. Yeah, they're probably an employee. But if you say, I have these three afternoons that we can have somebody come in and do gymnastics, which two do you want then? They're they're much more likely to be a contractor if they're also doing that for other people.

Speaker (00:23:55) (-) - They can't only be working for you unless they're building their business. Like if they're actively trying to recruit other clients. That also counts.

Speaker - (Absolutely.) - Well, hopefully Carrie and I helped you guys understand the difference between an employee and a contractor or 1099 versus W-2, and you do still have time to save yourself. So if you have only been doing this during 2023, taxes and payroll forms don't actually happen until the end of the year. Do yourself a favor right now. Stop what you're doing. Go. Even if all you're doing is signing up for QuickBooks payroll service, I will tell you it's going to be a change in your budget, but you have a choice changing your budget and keep your business. Or have somebody leave in January, leaving the next week who gets really annoyed when they find out in January that they owe taxes on what you paid them this summer?

Speaker - (Yep.) - So make sure that you're protecting yourself. You're protecting your business. Um, you know this. Is one of those things where Kate and I don't always come on to the podcast and talk about the coaching we do with the centers that we support, but this one was one where Kate got one, I got one, so both of us had clients who had this question and we went, aha, this means more people have that question.

Speaker (00:25:19) (-) - So if you feel like you're unsure about the legalities of business and things like that, please go get yourself a business coach or a business mentor. Because if this all came as a big surprise to you, there's going to be other things that also might come as a surprise to you. So we're going to strongly encourage you to go get yourself a business coach or a business mentor to make sure that your eyes are dotted and your t's are crossed, or is it the other way around?

Speaker - (Did) - you at least got the right to the right? Because I have a tendency to try to dot my t's and cross my eyes, so, you know,

Speaker - (okay,) - well, if you learned something from this episode, please share it. Share it with other people you know who are managers, share it with other people who run childcare centers. We'd love it if you'd go into your favorite podcasting app and write a review. Share it on social media. #Texas director. The more you share the show, the more people are able to keep doing this work without getting slammed with huge penalties and fees. And we think that's a good thing. We'll talk to you next week.

Speaker (00:26:28) (-) - Thank you for listening to Child Care Conversations with Kate and Carrie. Want to learn more? Check out our website at Texas Directors.Org and if you've learned anything today, leave us a comment below and share the show.