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Comment on are your outside salesmen really your employees from November 23, 2013 article

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Ken, 

    Your tax counsel may want to look at IRS Code 3058.  There is a similar code in California, and at least one California company has gotten a ruling that they can treat door to door commissioned sales persons as employees for licensing purposes, but treat them as independent contractors for tax withholding purposes (e.g. using 1099 instead of W-2).  The codes do require a written agreement with the sales person who must also receive a copy of the code section.

Alan L. Pepper

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Response

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    Actually I don't see a conflict between licensing (registering or certifying or documenting) a salesman as "your employee" and treating that sales person as an independent 1099 affiliate.  If the sales person is not engaged full time with you, has the option of working when and if he wants and can work for others, that person should fix a 1099 affiliate.  On the other hand, if you're putting someone out to the public as your representative and your state requires your sales help to be licensed, etc., (so that disqualifying action post your hiring comes to the attention of the AHJ who then knows to contact you) it  makes sense that you be required to license that person.  Be sure you are using the Standard Employment Contract and the Independent Sales Affiliate Contract.  It will guide and protect you.

    But, I'm not a tax expert.  Mitch Reitman is, so I asked him to respond.  Here is his comment:

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Ken

    Responding to Alan's comment:

    I have mentioned in articles and past posts on Ken's website that a business can file a Form SS-8 and have the IRS make the determination.  The danger, as I have mentioned, is that if the business has to abide by the decision if the election is not approved.  Of course having excellent counsel like MSK may help the taxpayer.

    The post in this case (and response) was in reference to an business using an administrative ruling by the State of California to support the contractor position.  A business also cannot contract away the relationship.  Absent a determination pursuant to the filing of an SS-8, the business could be in for a long fight with the IRS.  My point is that if the business is so certain that the contractor is a contractor and not an employee, they should file an SS-8.

    I believe that Alan is referring to Tax Code Section 3508, and which defines (in Sections 2(a) i and 2(a) ii)  the sale of consumer products in the home by independent contractors on a purely commission basis.  I would advise anyone seeking to treat this type of an arrangement as an independent contracting arrangement to seek tax counsel who can interpret the Tax Code and apply it to their situation.  As I have said before in this column, the next step would be to file an IRS Form SS-8   (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) .  If the IRS approves the Application, then the employer has a basis to treat these workers as independent contractors as long as the circumstances of the relationship are the same as those detailed in the Application (SS-8).  These determinations apply only  the employer seeking them and the circumstances detailed in the individual Application and do not apply to any other entities or circumstances.   They cannot be used as precedent.   Note that if the IRS does not agree that the workers are independent contractors, they must be treated as employees.  Also note that the IRS will also be on notice that the employer may be misclassifying employees, and that may be reason for an audit.   Note also that if you do not file an SS-8, an employee who believes that he/she has been misclassified can also file one.  Best to be first to the punch.

    The situation that I was referring to in the original post was an alarm company that was using an administrative ruling in a California licensing case as the basis for classifying workers as contractors for Federal withholding and FICA Tax purposes.  My advice was, and still is, that the IRS is not bound by,  and will most probably not give any consideration to these rulings. The states can, and will, however, share information with the IRS.  If the state agency that lost wants to "get even", the IRS is just a phone call away.   If an employer truly believes that its workers are contractors, then filing an SS-8 is the only way to be certain.

Mitch Reitman  

S.I.C. Consulting, Inc. 

817-698-9999  

MReitman@sicc.us  

www.sicc.us

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comment on 2Gig

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Ken

    I am a long time follower of your column. Also had the pleasure of meeting your daughter Jennifer at an Alabama meeting.  

    My comments . 1st indirectly 2 Gig [linear] Alarm. Com can I'm sure be creative ending the Costco. Best Buy deal. Alarm. Com is running TV commercials geared to the general public. I believe it's wrong as it does compete with 2 Gig installing companies.  It is a creatively competitive business out there. As a 30 year experienced Alarm company. I've seen a lot of it. As a former ADT dealer. ..I've seen about everything.  I think in the long run Costco is gonna drop it. Many of 

    Their clientele are higher end people. When they have problems... either installing or monitoring. ..trust me they'll be headed straight back to Costco.  I can just see them mounting a unit on there freshly painted or papered wall. .drilling a Couple holes. .and oops bad signal strength... now is time to take the unit down.... Try another spot [installers] would check 1st of course. .."sperience " as we say down south. .OR the DYI customer can now purchase an antenna extender... and deal with retrofitting it in the wall. . FUN..FUN..FUN.. and day didn't take the "T" bird away. . Well I am an older guy. Lol.

    Thank you again for a wonderful column. .. 

Greg Petrone

G&G Smart Systems 

Huntsville Alabama

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