Is Withholding Taxes On Sales Commissions “B.S.”?

Question: I just started working for a construction contractor, helping him find leads for future customers. He says he wants to “minimize risk” while paying me commissions on any jobs I give him leads on. That means I have to choose between:

1. letting him take withholding taxes from my commissions, or 

2. filing for an LLC or a corporation. 

I am a sole proprietorship. People are supposed to send me 1099s, but he’s not going to do that unless I have a corporation or an LLC. Is he really minimizing his risk? Or is this B.S. or what?

— Pete in California

Jacob Dayan from Community Tax answers…

Is it B.S.? Yes and no. I would call it an “imperfect application of common tax principal.” Let me explain.

In the small business world, there are few words more dangerous than “employee.” It’s a dangerous word because businesses with employees have many additional requirements — and pay extra taxes — than businesses with independent contractors alone.

For example, businesses with employees are required to…

  • withhold income and FICA tax from employee paychecks
  • pay 50 percent of the 15.3 percent FICA tax for each employee
  • file and pay payroll taxes
  • issue annual W-2 forms, among others

Because many small businesses want to avoid the extra time and expense needed for carrying official employees, there is pressure to classify as many workers as possible as independent contractors.

But the test on whether a worker is an employee or independent contractors has nothing to do with the label attached to the relationship. Rather, it’s how much control the small business has over the worker: scheduling, training, evaluation systems, degree of instruction, etc.

Distinguishing employee from contractor

The more control, the more likely that worker is an employee and not an independent contractor.

The IRS has the power to reclassify workers as independent contractors, and when they do, they can levy massive penalties on a small business.

Many small businesses think they can limit the risk of an IRS reclassification challenge by requiring their independent contractors to obtain an EIN. “If a business is paying another business,” the thinking goes, “the relationship is more likely to be considered an independent contractor relationship and not an employer/employee relationship!”

However, the test on whether a worker is an employee or independent contractor is based much more on control than on the labels the parties attach to one another. So paying a person with an SSN or a business with an EIN doesn’t make much difference.

Now, with all that in mind, let’s get to today’s question…

Based on the facts, it appears the construction contractor is giving you the choice of being classified as an employee and having taxes taken out, or as an independent contractor. If you choose the independent contractor route, the construction contractor is trying to limit the risk of you later being considered an employee and IRS levying penalties against it. But, again, it’s about control much more than it is about labels.

I struggle to call this “B.S.” because I think the employer sincerely is trying to limit its risk. But if IRS ever investigated the classification, they will be looking at the control the contractor has over you and not whether they put an SSN or an EIN on their paperwork. As such, I wouldn’t call the contractor’s EIN requirement B.S. — but rather an imperfect application of a common tax principal.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny. Either he or one of Debt.com’s other experts will answer you.

I Have Two Job Offers, Both At The Same Salary. Which Will Pay Me More?

Question: I suppose I have a very good problem. I’ve been offered two jobs. One is a promotion within my own company, while the other is a job of similar grade and pay at a competitor in another state.

It’s so hard to figure out which is better for me financially:

1. While the salaries being offered are very similar, the benefits are very different. One has cheaper healthcare but the other offers lower deductibles.

2. The out-of-state company will pay for my moving expenses, but I’ll have to pay to break my current lease, and I’m not sure what rents will be like in the new city.

How do I compare apples to apples, Mr. Dvorkin?

— Katrina in Illinois

Howard Dvorkin CPA answers…

First, congratulations on multiple job offers. Besides the birth of a first child, I can’t think of a stressful situation that’s more satisfying.

Second, I applaud you for realizing a salary isn’t the only measure of a job’s potential earnings. Benefits can add to — or subtract from — your paycheck in significant and surprising ways.

In fact, I was just reading a fascinating report about benefits. (I realize this may not be fascinating for normal people, but what can I say, I enjoy this stuff.) The insurance firm AFLAC — you’ve probably seen (and heard) the duck mascot — just issued its annual Workforces Report. The big conclusion: “58 percent of employees say they’re at least somewhat likely to take a job with a slightly lower salary but a more robust benefits package.”

Of course, figuring out how to “compare apples to apples” is increasingly difficult as benefits packages get more complex. For that, Katrina, you don’t need a CPA like me. You need to consult your Human Resources department first. That’s because…

One of the best-kept secrets for saving money is your Human Resources department. 

Many employees rarely consult HR after they get hired, and then only to inquire about health plans. They don’t ask about health savings accounts or even retirement savings options. HR can even set up split direct deposits, a little-known trick to save money that I wrote about last year.

For you, Katrina, HR can answer many of your questions at each company. You need to acquire the entire benefits package from both companies and study them. However, your journey for an “apples to apples comparison” has just begun. Among the other questions you need to answer…

  • What is the cost of living difference between these two job locations?
  • Does one city and state charge more (or any) income tax?
  • Will commuting involve more toll roads and more time idling in traffic and burning gas?

The bottom line, Katrina, is that you’ll need to invest a few hours of research. Then again, this research is all about making more money for you, so it’s definitely not boring. Good luck!

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask the Expert: Can I Ask a Personal Question?

Question: My son graduates from college in May. He’ll start looking for jobs real soon, but his Facebook page has all these photos of him drinking beer and posts about really juvenile crap. I’ve told him that all these things will hurt his job prospects. Know what he says?

“You’ve never been a boss, Dad, how do you know?”

He’s right. I’ve worked construction my whole life to put my kid through college, the first in our family. So I’m asking you because I took some of your advice before about credit cards and zero-percent promo offers and saved serious money. I figure you run a company and hire people. If you agree with me, I’ll show my kid what you say.

If you don’t, well, I’ll show him that too and get off his back.

— Art in South Carolina

Howard Dvorkin CPA answers…

Actually, it’s refreshing to answer a question like this. While I’ll certainly offer my opinion in a moment, as a CPA, I prefer to research a topic before sharing my own thoughts. Here’s what I found.

Just last month, a jobs agency called The Creative Group polled advertising and marketing executives about the very question you posed. While you don’t mention what career your son is pursuing, it’s worth noting that in the advertising and marketing worlds, “63 percent of advertising executives and 44 percent of marketing executives said they search online for information about prospective employees at least some of the time.”

More important than what they see is what they do…

Almost half (48 percent) of advertising executives and more than one-quarter (26 percent) of marketing executives have decided not to extend a job offer to a candidate based on what they uncovered online.

Now my opinion.

Debt.com hires for all kinds of jobs, from writers to business analysts to computer programmers. Because of the nature of our business, we always check out the online presence of our job applicants. We’re on a noble quest to rid America of crippling personal debt. People trust us with their financial details. I need to know our employees are mature and can inspire confidence.

This isn’t about invading anyone’s privacy. I’m equally against that. However, if we can conduct a cursory Internet search and spot troubling signs on page one of the the results — well, that’s not private. When I speak to other business owners, they feel the same.

I now hope your son feels the same.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: When Does A Small Business Become A Big Problem?

Question: I read the weird question you got last month from a mom whose son didn’t want to take her money. He wanted to start a pool-cleaning business by himself without any help. Well, I have the opposite problem.

My 16-year-old daughter wants me to loan her $500 to start a handmade jewelry business. Thankfully, I have the money and no credit card debt. (I took your advice and called for help a couple years ago.) So I’m not worried about losing the money. I AM worried my daughter will get so discouraged if she fails, she won’t appreciate the value of money. 

What should I do?

— Amanda in Idaho

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastIf I understand your concern, you think your daughter will lose your money and not feel the proper pain — because it wasn’t hers. I think you’re half right.

The best way to impart the real-world lessons about money on our children? Make them earn the money, then let them lose the money.

So in your case, I’d give your daughter chores or other work so she can quickly earn the $500. Yes, that will delay the start of her business by perhaps a few months, but if she then fails in her jewelry business, the sting will stay with her.

Actually, I believe your daughter wins whether she succeeds or fails — and so do you.

Let’s suppose she sells enough jewelry to not only recover the initial $500 investment, but she also earns enough to spend on entertainment, shopping, or whatever she wishes. You might find that frivolous, but it can also be educational.

If your daughter wastes her money trying to impress her friends, you can help her realize the futility of that. You can also encourage her to save for college or a car, or some other purchase that involves delayed gratification.

Now, what if she fails horribly?

For $500, you’ve taught your daughter that many successful people fail. What made them a success was getting back up after getting knocked down. In fact, I’ll make you a deal: If your daughter’s first stab at being an entrepreneur fails, tell her to email me at the address below. I’ll personally help her create a business plan for another attempt.

Why? Because I don’t know a successful businessman (certainly, myself included) who hasn’t struggled at some point. As you can tell from what I’ve written here and elsewhere, much about success isn’t about what’s in your wallet. It’s what is in your head.

 

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: How Do I Convince My Kid To Take My Money?

Question: I bet you don’t get many questions like this one, Mr. Dvorkin. How do I persuade my stubborn son to accept my donation toward his new pool-cleaning service?

Here in Florida, there are many pools, and they all need frequent cleaning. Of course, there’s much competition among these cleaning services, and my 18-year-old has worked for several since he was quite young. Now, while he’s a high school junior, he wants to see if he can launch his own business.

I offered him $2,000 so he could afford the equipment, which can cost a pretty penny. I told him he wouldn’t need to pay me back — no strings attached. He said no, he doesn’t want any help. So he’s not only going to school, he’s working nights so he can save up for the equipment.

So please, tell me how I can change his mind!

— Eleanor in Florida

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastAfter more than two decades as a CPA and financial counselor, I’ve learned that money is not just a financial instrument, it’s often an emotional condition.

Financially, your son is foolish to refuse a donation of $2,000 toward his new business. Emotionally, he wants to make it on his own. While that may frustrate you, I firmly believe you should be proud of his decision: You’ve raised a son who doesn’t want a handout. I’ve found, in my own career, that business people with this trait end up being the most successful in life.

I can, however, propose a middle ground.

Your son obviously doesn’t want a donation, but how about a loan or an investment? If you check out Debt.com’s peer-to-peer lending page, you’ll see interest rates as low as 9.33 percent for 36 months. You could offer him something similar. Even show him that web page so he knows you aren’t offering him any “family discount.”

Another option is to invest in his business as a silent partner. You could negotiate with him on terms. I’d suggest you and your son look up Junior Achievement and find the branch nearest you. JA has taught millions of young people about how to start and run a business, and as a fellow Floridian, I know there are many branches in the state.

Bottom line, Eleanor: Be proud of your son, and realize the rest of what we’re talking about are the details.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: What Stinks About Being The Expert?

Question: I’ve been unlucky enough to have a lot of financial problems the past couple years. Then again, I’ve been lucky enough to ask questions to both you and Steve Rhode at Get Out of Debt Guy — and both of you answered me! I know you get more questions than you can possibly answer, so that’s at least one thing that went my way.

I’m not totally out of the woods yet, but thanks to you and Mr. Rhode, I’m in a much better place financially. So it made me wonder: Everyone comes crying to you, doesn’t that stress you out? 

— Peter in Florida

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

After two decades as a personal financial consultant, author, and CPA, there aren’t many questions I haven’t heard before. Yours is definitely one, Peter.

In fact, your novel question inspired me to sit down with Steve Rhode and answer it with him. We shot this short video and discussed some of our most personal questions about personal finance…

One question you might have after watching the video: Aren’t Steve and I competitors? After all, we both run websites that specialize in helping people get out of debt.

The answer is no. As Steve has often said, there are sadly so many Americans struggling with their finances, the supply of expert advice has yet to meet the demand. In fact, Steve Rhode is an official Debt.com partner, which means we help each other’s sites to reach the most amount of people — and solve the most amount of debt!

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: Should I Work In The Same Office As My Wife?

Question: I work as an insurance agent in a large national company — you’d recognize the name. My wife is the office manager for a local insurance agent with another company. Her boss wants to hire me.

I’d get a pretty decent raise and wouldn’t have to commute as far, but I worry about being in the same office all day with my wife.  I always hear bad things about couples who work together. They spend so much time around each other, they fight. I don’t want to get a raise and lose a good woman. Any advice?

— Patrick in New York

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastFunny you should mention this, Patrick. Just last month, I read a study on the topic. Yes, researchers actually looked into this.

I’ll spare you the suspense and first tell you what they found. First, couples who work together don’t necessarily argue more. Second, many of them argue less. Here’s what they say…

Dual career couples with the same occupations or work places may have a happier family life and less job and family tension as a result of the work-related support they can offer one another. The beneficial impact is twice that for work-linked couples compared to non work-linked couples.

What’s a “work-linked couple”? That’s what researchers at Utah State University call one of these three situations…

  •  They share an occupation. In other words, they might be insurance agents, but at different companies.
  • They share a workplace but not the same occupation. This would be your situation with your wife.
  •  They share both workplace and occupation. Imagine if you and your wife were both insurance agents in the same office.

Researchers admit these arrangement blur “work/home boundaries” and “may make balancing work and family more challenging.” I’ve found this to be true, especially when I’ve worked with couples in the same office. All things being equal, I think couples thrive more when they work in different places and have different things to talk about when they get home.

That said, I’m also a CPA and credit counselor, and I like hearing about raises and shorter commutes (which also saves money). Before you take the job, however, I’d ask some other questions…

  • What about health insurance? While not universally true, smaller businesses often have less comprehensive healthcare plans. You want to ensure your raise isn’t being spent on higher premiums for less coverage.
  • What about promotional opportunities? In a small firm, there might be fewer opportunities to move up and earn more. Then again, one of those opportunities might be as partner in the firm or even purchasing it from the owner if he’s retiring soon. You need to have a frank conversation about this.
  • How healthy is the company? If both spouses work in the same place, and that place goes out of business, both incomes are instantly gone.

As you can see, Patrick, my concerns are less about the dynamics of working together and more about the fiscal realities of the job. First, you need to address the questions above. Then if you decide to take the job, I’d suggest you read this Washington Post story from a couple of years ago. It documents couples who work together.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: I Need A Job. Are Employment Agencies Legit?

Question: I already work 9 to 5 as a receptionist in a doctor’s office. Now I’m looking to work 5 to 9 at some entry-level job so I can make enough money to pay off my credit cards. Why? Because I want to buy my own house someday, and I just turned 30. I want “someday” to be before I’m 40. 

Here’s my problem: Many of the jobs I’ve looked into are from “temporary staffing agencies” and “employment agencies.” Are these legit? What’s the difference? How much of my money will they take? Since I’m looking at basic jobs, it’s not like I’m going to make a lot in the first place.

— Michelle in Indiana

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastDon’t worry, Michelle, a reputable employment agency or temporary staffing firm won’t take any of your hourly pay. What’s the difference between the two? Employment agencies help employers find full-time, permanent workers, while temp agencies assist with short-term assignments.

It can get confusing because “temp agencies” can also place permanent workers. For instance, Manpower is a national firm that offers “temporary to permanent” assignments — which means if you do well, you might stick around for a long time.

Pros and cons

As for how Manpower makes its money, it’s not from you directly. From its FAQ: “Manpower works on your behalf to place you with some of America’s most admired companies — at no charge to you.”

So how do these employment and temp agencies make money? They charge the employers who come to them looking for talent. They usually charge the employer a percentage of your starting salary, which might make you skeptical: “I’ll be paid less than if I just got the job without going to an employment agency!”

That may be true, but here’s what usually happens: The employment agency lobbies the employer to boost the salary, both because it makes it easier to find quality talent and because it boosts the agency’s bottom line.

Still, there’s been controversy about these firms ever since the Great Recession. Jobs site Careerbuilder has reported that in the first four years after the recession, temp work accounted for 15 percent of all job growth. That contributed to what’s known as underemployment — when Americans want to find full-time work but have to settle for part-time.

In your case, Michelle, you’re simply looking for a second job for the admirable purpose of paying down your debts. You’ll become one of the 7.3 percent of employed Americans who hold a second job, according to the federal Bureau of Labor Statistics.

I don’t want to discourage your work ethic, Michelle, but I might suggest you review your finances to see if you really need to moonlight at all. Call us for a free debt analysis at  1-800-810-0989. If nothing else, our counselors can offer advice on how to best pay down those credit cards quickly.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.