Friday, April 13, 2018

Hazards in Using Subcontractors/Vendors

Many cleaning firms are using independent contractors or vendors to do their work. The avoidance of payroll taxes, supervision and record keeping are the main reasons for doing business in this way.

There are several downsides to such an operation, all of which are overwhelmingly negative. When you use a legitimate sub, you lose personal control of how your customer is treated. Customer retention is more difficult, as it becomes a distinct possibility that “your” customer will become “their”" customer.

Finally, the IRS is probably the best argument against using a sub. The IRS has always given attention to carpet cleaning, floor cleanings, janitorial services, etc. If after an audit a subcontractor is deemed to be an employee, penalties and interest will be applied and an audit may be extended to previous years. Ultimately, if the penalties and interest can not be paid within a certain time frame, some companies have been forced to liquidate.

Some of the criteria the IRS applies to determine if a subcontractor/vendor relationship is legitimate are as follows:

  1. Do the subs set their own hours?
  2. Provide their own trucks, equipment and supplies?
  3. Provide their own insurance?
  4. Hire their own help and pay payroll taxes?
  5. Have the freedom to do similar work for others?
  6. Work without your supervision?

Related Information and Articles:

These are just a sampling of the factors the IRS will apply in determining if a firm is employing legitimate subcontractors/vendors.

If you use an outside company to do your work, be sure they meet the requirements for subcontractor status. Once again if you fail, it will could be financially painful, even to the point of putting you out of business.

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The Bane-Clene® Team.

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