Can hired salespeople be considered subcontractors?

28 replies
I'm kicking around getting some outside sales people to work with me on a commission only basis. Since they'd be "commission only" and I wouldn't be micro managing them day to day, could I set them up as subcontractors (or whatever you'd call them) and only be required to send them a 1099 at the end of the year?

Mike
#considered #hired #salespeople #subcontractors
  • Profile picture of the author bob ross
    Originally Posted by mrcouchpotato View Post

    I'm kicking around getting some outside sales people to work with me on a commission only basis. Since they'd be "commission only" and I wouldn't be micro managing them day to day, could I set them up as subcontractors (or whatever you'd call them) and only be required to send them a 1099 at the end of the year?

    Mike
    I have years of experience hiring subcontracted salespeople. You absolutely can 1099 them, just make sure that you are following the IRS guidelines for subs.

    Basically you cannot tell them how to do their job, you can't treat them at all like they were an employee or that you are their boss. That sounds really bad but that's how the IRS views it.

    "Commission only" is definitely the right way to pay them.
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    • Profile picture of the author kenmichaels
      Originally Posted by bob ross View Post


      Basically you cannot tell them how to do their job, you can't treat them at all like they were an employee or that you are their boss. That sounds really bad but that's how the IRS views it.
      by that he means you cannot tell them when to take lunch, or even how long lunch can be.

      You also cannot tell them when to stop or start work.

      You also cannot force them to goto in house meetings @ any set time.

      If you do, any of those ( and a few more that i forget off the top off my head ) they are NOT considered independent contractors

      and, the tax man is not your only concern, if you do any of those,

      they can claim unemployment, sue you for over time, and more ...

      ---

      What you can do is offer a sliding scale commission structure,
      that will entice the salespeople to do what you want.
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      • Profile picture of the author HypeText
        Originally Posted by kenmichaels View Post

        by that he means you cannot tell them when to take lunch, or even how long lunch can be.

        You also cannot tell them when to stop or start work.

        You also cannot force them to goto in house meetings @ any set time.

        If you do, any of those ( and a few more that i forget off the top off my head ) they are NOT considered independent contractors

        and, the tax man is not your only concern, if you do any of those,

        they can claim unemployment, sue you for over time, and more ...

        ---

        What you can do is offer a sliding scale commission structure,
        that will entice the salespeople to do what you want.
        They have expanded this to 20 points total, some of them are:

        1) If you have to train them

        2) If they are using your materials (Forms, Collateral, etc)

        3) You tell them how to do their job

        4) If they answer directly to you

        They are making it VERY hard to hire Commission only 1099 Sales People.
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        • Profile picture of the author ronr
          I couldn't find the 12 point list but can the training be optional? Otherwise how to the thousands of sales agents (like real estate) be considered indpendant. Most real estate offices have in house sales training and the companies have rules etc.

          Ron

          Originally Posted by HypeText View Post

          They have expanded this to 20 points total, some of them are:

          1) If you have to train them

          2) If they are using your materials (Forms, Collateral, etc)

          3) You tell them how to do their job

          4) If they answer directly to you

          They are making it VERY hard to hire Commission only 1099 Sales People.
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          • Profile picture of the author HypeText
            Originally Posted by ronr View Post

            I couldn't find the 12 point list but can the training be optional? Otherwise how to the thousands of sales agents (like real estate) be considered indpendant. Most real estate offices have in house sales training and the companies have rules etc.

            Ron
            Real Estate agents, Insurance agents, Mortgage Brokers, etc, are licensed individually in the states they do business in which creates a loophole so that they are viewed as a separate business entity.

            You can find a copy of the 20 questions identifying an Employee VS IC here:

            http://erginc.com/pdfs/independent_c..._questions.pdf

            The full IRS Document is here: (VERY DRY READING!)

            http://www.irs.gov/pub/irs-utl/emporind.pdf

            Note that the first page of Section 2-1 explicitly exempts Real Estate Agents from being considered Employees.
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  • Profile picture of the author globalpro
    Best bet is to call IRS direct (expect some time in getting through) and they can tell you exactly what to do.

    Biggest thing is to make sure they give you a signed copy of the 1099 form for you to have on file. It's the only protection you have if they don't pay taxes on 'commissions' you pay them.

    Thanks,

    John
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    • Profile picture of the author Jeff Chandler
      Check IRS guidelines for this at Independent Contractor (Self-Employed) or Employee?

      Exactly what Bob said. Be very careful to follow those guidelines or you could be hit with some pretty big tax bills if IRS makes you reclassify your salespeople.
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      • Profile picture of the author David Miller
        You can and should establish by contract the relationship that exists and what constitutes the business relationship. This is particularly important when it comes to products or services that have a residual. The last thing you want is to be paying a commission to a rep that is no longer active and you end up providing all the customer service and support.

        I always had independent contractor agreements and defined what level of "activity" was required to be considered elegible for any type of commission.
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      • Profile picture of the author HypeText
        Originally Posted by Jeff Chandler View Post

        Check IRS guidelines for this at Independent Contractor (Self-Employed) or Employee?

        Exactly what Bob said. Be very careful to follow those guidelines or you could be hit with some pretty big tax bills if IRS makes you reclassify your salespeople.
        Very True! Whatever the unpaid Taxes are PLUS of a Fine of up to 35% of the total Tax Bill Tacked on....the IRS is cracking down!
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    • Profile picture of the author SirThomas
      Originally Posted by globalpro View Post

      Best bet is to call IRS direct (expect some time in getting through) and they can tell you exactly what to do.

      Biggest thing is to make sure they give you a signed copy of the 1099 form for you to have on file. It's the only protection you have if they don't pay taxes on 'commissions' you pay them.

      Thanks,

      John
      That form is actually W-9. 1099 is what you send them after each year with the amount they earned that year. There is also a form confirming they eligibility to work in the U.S. I forgot the form's number now.

      Instead of IRS, I suggest to get an appointment with a good accountant.

      Thomas
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      • Profile picture of the author globalpro
        Sorry, my bad. You are right.

        Thanks,

        John

        Originally Posted by SirThomas View Post

        That form is actually W-9. 1099 is what you send them after each year with the amount they earned that year. There is also a form confirming they eligibility to work in the U.S. I forgot the form's number now.

        Instead of IRS, I suggest to get an appointment with a good accountant.

        Thomas
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  • Profile picture of the author moneysavvy
    Would anyone be willing to share an example of a sales contract that they have used?
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  • Profile picture of the author pandadoodle
    I can't help with tax side of things with you being based in the USA.

    But from my experience be prepared for a high turn over of staff. 1 in every 10 sales person you hire will be pure gold the rest will be rubbish the trick is to build a team of 10 gold sellers.

    Although you don't want to micro manage them I would set 1 day a week where they come to your office or spend 2-4 hours on skype talking about plans and what they are doing. Lead generation and so on.

    Id set up a list of targets, make it clear what happens when targets are met and what happened when they are not.

    If the targets are missed 2-3 times in a row you fire them end of story they no longer work for you no matter what sob story they give you and believe me you will get a few!

    When my sales guys hit the targets they normally have cash bonus, days out, weekend pass at the golf course etc, set up mini games for them to compete against each other etc winner gets a case of beer.
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  • Profile picture of the author Jason Kanigan
    I do this all the time, as the sub. As the client, you have to stay away from the W2 definition. This means you can say what you want done and when you want it done by, but not how and exactly what time you want it done.
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  • Profile picture of the author julianna
    Thank you for this VERY useful post!
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  • Profile picture of the author Rus Sells
    If you want them representing you're company the way you want them too, then you had better hire them as an employee, otherwise you cannot not dictate anything to them in regards to what hours they work, what tools or methods they use and you can't even tell them they can't offer your competitors services along side yours.

    You can pay an employee commissions only as long as each pay period you at MINIMUM pay them minimum wages if their commissions do not meet or exceed the minimum wage multiplied by the hours they worked.
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    • Profile picture of the author Kay King
      They are making it VERY hard to hire Commission only 1099 Sales People.
      When you hire an employee you pay workman's compensation, unemployment, perhaps benefits and you have payroll taxes, etc to do. The purpose is to make it harder for businesses to label employees as IC and thus avoid the safety nets accorded to salaried workers.
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      • Profile picture of the author mrcouchpotato
        Ok. So this sounds like it's more trouble than it's worth. I'll have to try something else.

        Thanks for all your input.

        Mike
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  • Profile picture of the author DennisM
    Hey Mike,

    Don't give up! Here's what you do...

    Have each sales rep set themselves up as a Corporation. LLC or S-Corp will do (stay away from C-Corp as that's double taxation). Although the LLC or Corp will run a few hundred dollars the SOLE PROPRIETOR is a great and cheap option. Here in Illinois one obtains a business license from the county you reside in.

    If anyone wants to work "with me" they must incorporate or be a sole proprietor. It's that simple. What I do is I don't pay the sales reps anything until they comply. This is in agreement of course and they understand why.

    Dennis
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  • Profile picture of the author sdentrepreneur
    I have been looking for some commission only sale persons lately myself. I have found that most the top sales persons are getting paid some type of salary. Paying only straight commission is hard to find quality sales people.
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    • Profile picture of the author Rus Sells
      Originally Posted by mrcouchpotato View Post

      Ok. So this sounds like it's more trouble than it's worth. I'll have to try something else.

      Thanks for all your input.

      Your name says it all. Not to be offensive but saying it more trouble then it's worth kind of communicates the level of dedication and seriousness you have about your business. Lazy for lack of a better word.

      Mike
      Originally Posted by DennisM View Post

      Hey Mike,

      Don't give up! Here's what you do...

      Have each sales rep set themselves up as a Corporation. LLC or S-Corp will do (stay away from C-Corp as that's double taxation). Although the LLC or Corp will run a few hundred dollars the SOLE PROPRIETOR is a great and cheap option. Here in Illinois one obtains a business license from the county you reside in.

      If anyone wants to work "with me" they must incorporate or be a sole proprietor. It's that simple. What I do is I don't pay the sales reps anything until they comply. This is in agreement of course and they understand why.

      Dennis
      Dennis, I used to require this when I owned and operated my construction company however, if ever examined closely this method does have some rather large holes. If your sales force's company's are ever examined and called into question for legitimacy and its found that all their receivables are coming from your company it can be construed as an effort to circumvent having them as employees. Not to be-cry your way of doing things but you are treading on thin ice doing it this way. If any of them fail to do the proper annually paperwork etc. etc. their company can be considered no company at all and then they'd be seen as employees for which you will owe a ton of back taxes on. Just saying, be careful with this for your own sake.

      Originally Posted by sdentrepreneur View Post

      I have been looking for some commission only sale persons lately myself. I have found that most the top sales persons are getting paid some type of salary. Paying only straight commission is hard to find quality sales people.
      It is hard but it's doable and you have to have a system that closes people for these types of sales people to work for you.
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  • Profile picture of the author TopKat22
    You have gotten all the advice I would give you above except I would add, make sure not only to follow the IRS guidelines, but also the guidelines of your particular state which may be the same or more strict.

    Also, absolutely make sure you get a signed contract with exactly what you are expecting and the time for completion.

    You can get the basic contract online, just google it but I highly recommend you get the contract, spell out exactly what you are wanting and then run it by a lawyer who is well versed and has experience in this.

    Then once the contract is signed, make sure to never violate the conditions by "requiring" anything of them that
    1) violates the state or IRS rules or
    2) is not covered in the original contract without getting a signed addendum first.

    One more thing, it sounds scarier and more difficult that it really is. Like most business contractual matters, you just have to make sure you cross all your t's and dot all your i's.
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    • Profile picture of the author mrcouchpotato
      Your name says it all. Not to be offensive but saying it more trouble then it's worth kind of communicates the level of dedication and seriousness you have about your business. Lazy for lack of a better word.

      If you read any of my past posts, you'll see that I'm far from lazy. I chose that username over 3 years ago when I was doing online marketing and thought it would be fun to make money while sitting on the couch watching TV. We all know that's never the case and so did I, but I liked the name anyway.

      Maybe I should have chosen Einstein so then everyone here would know that I'm actually a genius.

      Mike
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      • Profile picture of the author Rus Sells
        You can have your name changed here, just submit a ticket! First impressions are always the most important! = ) Looks who's talking aye?

        Originally Posted by mrcouchpotato View Post

        Your name says it all. Not to be offensive but saying it more trouble then it's worth kind of communicates the level of dedication and seriousness you have about your business. Lazy for lack of a better word.

        If you read any of my past posts, you'll see that I'm far from lazy. I chose that username over 3 years ago when I was doing online marketing and thought it would be fun to make money while sitting on the couch watching TV. We all know that's never the case and so did I, but I liked the name anyway.

        Maybe I should have chosen Einstein so then everyone here would know that I'm actually a genius.

        Mike
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  • Profile picture of the author Rus Sells
    The form is an I-9 for which one fills out to confirm eligibility to work in the U.S.
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    • Profile picture of the author Kay King
      Here's the explanation from the top:

      Independent Contractor (Self-Employed) or Employee?

      I know many salespersons require an advance on commission rather than straight commission (in many businesses this is the norm). Not sure where that advance puts them in the employment level.
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    • Profile picture of the author HypeText
      Originally Posted by Rus Sells View Post

      The form is an I-9 for which one fills out to confirm eligibility to work in the U.S.
      Rus, I-9 is to confirm eligibility of an employee to work in the US.

      It is generally signed off on by a W-2 Employee.

      Ind. Contractors must sign a W-9 which is to verify their Tax ID, whether a Social or FEIN.
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