Since 2010, state agencies (EDD in California) have busted more illegal workers and their employers than during the previous 20 years before. Most likely the surge in the enforcement of unlicensed contractor regulations was elevated to “front burner” status when unemployment reached record-setting levels during the housing “meltdown”! With the IRS seemingly mired in the mud with healthcare; it’s wise to keep a sharp eye in your rear view mirror for the recently “revved up” state unemployed cops. They’re camouflaged in a shirt and tie and they’ve gotten a lot meaner!
Sooner or Later We All Need Help
What’s all this big fuss about, you’re probably wondering! For us – landlords and property owners – it’s the resurrection of the age-old battle about who can perform work on our properties and must they have a license! Most Mom and Pop investors are never quite sure and most professional management companies pretty much accept the IRS and state’s fuzzy interpretation when the question arises – is there such a thing as a legal handyman or lady I can hire and not violate the current laws for hiring help? The answer, my friends, is yes – but please learn something about the rules!
Both the Employment Development Department (EDD) in California and the IRS believe there are only two kinds of workers in the entire labor universe as they see it.
First, there’s what they refer to as employees or W-2 wage earners. Obviously, with employees, there’s employers who must supervise and pay wages to their employees. The government holds employers accountable for withholding all payroll taxes! It’s also the employers who are charged with sending the various payroll taxes to the taxing authorities.
Independent contractors are the other kind of workers allowed to earn money working on your properties. Many have state contractor licenses to perform their specialized trade in a particular field, i.e. plumbing, electrical and roofing. There is a kicker however; independent contractors are not required to have a state contractor’s license unless they perform work exceeding $500 (material and labor) in a specialized trade where state law requires a license. To the point, laws in my state, (California) do not require a contractor’s license to perform handyman services for jobs under $500 (labor and material). Thus, within these rules, a handyman can be an independent contractor (IC). There are literally thousands of them working as such!
Smart Investors Can Do Stupid Stuff
An investor friend of mine who owns 16 houses and a couple duplexes with at least two million dollars’ worth of equity loves playing Russian roulette with the family business. Like clockwork, four days a week he gets up bright and early and revs up his rusty ol’ pickup and heads toward the Home Depot store about a mile away. About 7 a.m. every morning, you could see ‘em startin’ to gather from a half mile away! Down on their luck workers parading up and down the sidewalk in front of the big neighborhood Home Depot, just hoping they’ll be picked up and offered a full day’s work!
When I first learned about this, I promptly advised my good friend (and student) we should immediately pray together! I may not be the state’s leading authority on hiring help, but I know enough to advise my friend – that he’s playing Russian roulette with a live round in the chamber!
Before we discuss how to hire a handyman worker, let me simply tell you that state unemployment departments (EDD in California) and Uncle Sam both hate workers who get paid without having paycheck stubs showing their deductions taken out. They know, and of course, they’re absolutely correct, that if deductions for FICA, federal payroll tax and unemployment taxes are not held back and paid by employers, they can kiss ‘em farewell nine times out of ten! Obviously, they love employers with I.D. numbers who withhold taxes from employees, contribute their matching amounts and see that all the monies are mailed to taxing agencies on a timely basis. It makes a tidy package for the government – wouldn’t you say!
As you may have already guessed, most handyman workers don’t care diddly-squat about a tidy package! They much prefer receiving a dollar’s pay (cash preferred) for a dollar’s worth of work. A deduction from their pay is exactly what they don’t want! Herein lays the dilemma when we investors are trying real hard to be good law-abiding citizens, and at the same time trying to build financial security for ourselves and families. Knowing the right way to hire a part-time helper may not be enough to convince you to do it, but this knowledge will assist you in making an informed choice about how to run your business.
Pick Your Poison, Two Choices Available
- · First, you may choose to become an employer. I won’t attempt to explain everything that’s involved, but I will tell you where to get all the details free. Send for CIRCULAR E, EMPLOYER’S TAX GUIDE, PUBLICATION 15, Department of Treasury, DistributionCenter, P.O. Box 8908, Bloomington, IL61702-8908 or call 1-800-829-3676, 9 a.m. till 2 p.m. Anyone who is even thinking about hiring help should have this information on hand so they know the rules.
- · Choice number two is to hire an independent contractor (IC). Generally speaking, most everyone who works for themselves is an IC. When your toilet plugs up during the middle of the Super Bowl, chances are, the plumber you call out is an IC, “Johnny’s Plumbing Service”. Johnny’s truck is loaded down with pipes, ladders, ropes, shovels and toilet plungers.
When Johnny’s all done and your toilet’s flushing bubbly-clear water again, he hands you a billing statement with his logo printed right on top! It simply says Emergency Call-Out work completed $100. Naturally, he asks, “How do you wish to pay?” Sound familiar! Just about all IC s use the same billing routine. The Maytag washing machine guy, the TV technician and the air conditioning repairman all bill you about the same way. When these guys are working for themselves, generally speaking, they’re all legitimate independent contractors (ICs).
Most real estate investors like myself, don’t like either option! We don’t like employees ‘cause we hate all the recordkeeping – W-2’s employer ID numbers, payroll deductions, plus the extra cost of having Workers’ Comp insurance. Besides, who needs all the hassle for just a couple of day’s help every now and then? At this point, I’d like to tell you we have another choice, but unfortunately wedon’t! You have to use one of the two methods – either EMPLOYEE or IC otherwise, you’re sticking your neck out way too far! I think you’ll agree that there’s no point in losing the ranch to the hired hands!
Let me explain how I view it! When you’re just starting out as an investor and you don’t have very much to lose or at least nothing anyone wants – say your junky duplex with a top-heavy mortgage payment, why worry about alawsuit? You have nothing with much value (equity) to lose! On the other hand, once you begin building up equity, say your own home is free and clear and you’ve stashed a few bucks in the bank; now you certainly don’t want a handyman who’s neither an employee nor IC falling off a ladder at your property. When the lawsuit is over, your fallen worker might own the property and you’ll be the handyman! Not a very pleasant thought when you’re hoping to become a millionaire!
You Must Make the Tough Decisions
Hiring a part-time handyman or becoming an employer is a decision you must figure out for yourself. You can do either one you choose, but whichever you pick, learn the rules and get it right. Most certainly, the risk factor deserves some serious consideration.
Years ago when I first started fixing rundown houses, I reached a point where I needed someone to help me. I didn’t need a full-time helper or even a very skilled person! Just someone who was willing to help me a day or two every now and then! Naturally, I was on the job myself, so I could tell my helper exactly what work I wanted done. Quite often two people can knock out small jobs much quicker than doing the work alone. Re-roofing, building fences and cleaning up junky properties are several examples. It’s also much faster, which in turn allows you to rent out your property quicker than if you did everything by yourself.
Most often when you find a handyperson who says they’re willing to work for you – the first two questions out of their mouth are, “How much do you pay per hour and can you pay me in cash when I finish the job?” Most Mom and Pop investors will answer yes to both questions without batting an eye – and often when they do; they’ve violated the state and federal employment laws! OOPS!
Paying Cash Always Big No-No
When I first started investing, I always paid my workers or handyman when the job was done. I wrote out a check so I’d have a payment record. My advice to you is never pay workers with cash! You might slide by using a broad interpretation of the IC rules should you ever get called for an audit, but paying cash to your worker will sink your ship before you ever reach the shore! Also, if you don’t keep payroll records, you’ll lose out on your tax deductions. Naturally, if you’re caught without records, almost everyone will automatically assume you’re hiding something. My advice, keep good records no matter what method you use to hire help.
Definition of Independent Contractor
Basically, an independent contractor is a person who is in business for himself. That’s exactly what most handymen will tell you they are. However, all handyman workers are not independent contractors just because they say they are. True independent contractors have some clear and distinct differences from those who are clearly not. The whole concept of an IC is they are supposed to perform their work independently. They don’t require your daily supervision – at least that’s the theory anyway.
Although handyman contractors may not need a state contractor’s license, they are generally required to have a city business license or permit. They are independent businessmen who work for themselves. They find their own jobs, they present cost estimates for their work and when the job is done, they hand you the bill.
Another indicator, which suggests they’re in business for themselves, is when you see their advertisements for hire in newspapers or telephone yellow pages. You might also notice that many IC’s have signs on their pickup trucks like – SAM’S “DO IT ALL” HANDYMAN SERVICE. Many work out of their homes or rent tiny office spaces. Clearly they look and act independent. Although rare, should your handyman worker just happen to be doing business as a “one man” corporation, your worries are over. A corporation automatically passes the separate entity test. After all, that’s what a corporation is in the eyes of the law. Corporations have their own employer I.D. numbers and state and federal agencies can quickly find them if they wish. Some ICs also file separate tax returns for their business.
Get It in Writing
One of the most important factors in determining worker status is the intentof the parties. Obviously, when your intentions are spelled out – written up and agreed to using an Independent Contractor Agreement, you now have documented evidence of what the parties have agreed to. Since both parties have signed an agreement stating prices and scope of the work to be done, it makes a pretty strong case in determining what the parties believe they’re doing. It most certainly proves they’re not trying to hide the activity – still there are some other important factors that help separate a true I.C from workers who clearly would be judged to be employees. If a handyman works solely for you, he begins to smell like an employee. On the other hand, if he works for the public at large and has lots of clients, clearly he begins to look like an independent business person!
Be Advised of the Unknown
A rather serious situation can develop when you’re trying to fudge a little bit. Even though you call your handyman an independent contractor, he works on your houses nearly every day and you pay him an hourly rate without withholding any employee taxes. Because you’ve judged him to be an independent contractor, chances are you haven’t purchased Workers’ Comp insurance. There’s no need to because you’re only required to have Workers’ Comp when you have employees! So far, everything seems just fine! Life is good!
Suddenly, out of the blue one day, you receive a call from MercyMedicalHospital. Nurse Retched informs you that she has your man there. He just fell off a ladder and broke his neck at your duplex! She says, “I won’t hold you up too long here; all I need is your Workers’ Comp policy number and I’ll be out of your hair”.
If your answer is – I don’t have Workers’ Comp or if you might blurt out your homeowner’s policy number and hope she hangs up the phone – the silence you may hear is only temporary!
After all the dust finally settles, should your handyman be judged an employee rather than an IC? Well, I think you get the picture!
Jay P. DeCima, aka Fixer Jay, lives in Northern California where he operates multiple rental properties. With nearly 50 years’ experience, he’s a street-wise landlord and best-selling real estate author. Jay’s self-help books have been voted #1 by The Los Angeles Times and Chicago Sun during the past 15 years.
Jay’s latest book, The Real Estate Fisherman (due out mid 2015) has information packed chapters and a wealth formula on how small “Mom & Pop” investors can build a lucrative real estate business, part-time or full-time and feed yourself for life.