That trepidation is increasingly being felt by small business owners, too. Specifically, the IRS has honed in on how business owners are classifying workers -- independent contractors or full-time employees.
The Wall Street Journal recently took a look at this trend
in a story that served as a call to action for serial entrepreneur Peter J. Burns III
Burns, who started his first business at age 19, suggests a unique solution for small business owners -- or any business owner, for that matter -- facing this type of problem.
Burns suggestion: make the employee a small company.
“Rather than hire the individual as an employee, the entrepreneur explains to the individual what the benefits would be if they were to incorporate by obtaining the necessary EIN number, bank account, and business license to establish a consulting business in their specialty field,” Burns told the Digital Journal. “The consulting business would then contract with the small business for this service.”
That’s right. Burns suggests that instead of hiring on full-time employees to work for your small business, why not have that individual create their own start-up consulting firm, which would then contract with your small business for work.
No catches. No hoops to jump through. It would function as any other business-to-business interaction would, and you would not be faced with the difficult task of categorizing a worker as an independent contractor or full-timer.
And as of this point in time, and according to Burns’ knowledge, this is 100 percent completely legal and within all IRS rules, regulations and guidelines. In fact, Burns has employed the model with his company B3 Funding Partners
, which serves as a portal, or conduit, between small and medium-sized businesses in need of capital and willing lenders.
In an exclusive, in-depth interview, Burns discussed how he came up with this idea, what it means for the IRS and most importantly, what does it mean for you and your business. Here’s what he had to say:
CC: How did you come up with this idea?
PB: I look at it from a purely business stance. The government is jamming us [small businesses] right now trying to make it to where if you have 50 employees or more, they’re trying to force you to have ObamaCare. They are taxing us into nonexistence… So I said let me take a look at how I can solve one big problem: I’ve got a business and I’m growing, and I need help, but if I bring people on I have all of the restrictions of having to worry about unemployment insurance, withholding taxes, benefits…
And then I said, "What if the individual became a business themselves and simply had their services exchanged for full compensation from the company?" It wasn’t the half-solution of being an independent contractor… That is so restrictive on all of the elements you have to prove, and then the IRS will slam you and fine you, both the individual and the employer, if they disallow that.
But they can’t do anything about incorporating and starting a business because that’s IRS guidelines and if you adhere to exactly what they require (EIN number, bank account, contractor services), then you’ve come up with a solution using their own legislature against them. I’m not trying to say we’re anti-government. I’m saying if they want us to play by the rules, then they have to obey the rules too. I see it as a really good solution; I see it as a way to hire yourself. You create a little company – you get to offset all of the other expenses you can’t do as an individual. The company itself that needs those services pays a simple gross amount which is up to the client company… if they don’t perform correctly then you sever the contract – you don’t have unemployment insurance, you don’t have to worry about them filing for unemployment, you don’t have any of the headaches…
CC: What are the benefits of doing this?
PB: The top benefits are that it is a simple transaction between business to newly created business without any of the hair of reporting and withholding taxes, or with social security and health care et cetera, et cetera, et cetera. It streamlined what was the relationship between the employer and employee – it streamlined it into a very efficient business model, which is what capitalism is supposed to be all about anyway.
You don’t have to worry about hiring them [independent contractors] and making them an employee and towing the line for all of the things you have to do that the government requires. It is a simple exchange of services for money for an actual service performed, agreed to and paid for.
In this case the IRS code doesn’t have anything to do with it. It is a “pay-for-services to an actual company to company transaction.” Period.
You agree on a payment amount, service is rendered, you pay it and it’s a straight deal. I don’t see the negatives in this…except the IRS can’t grab a bunch of money from people and there’s no way to actually screw the individual or the company if you use my process. I can’t see the negatives, honestly.
CC: What did your lawyers and accountants have to say about this? What is the IRS going to think?
PB: I do not believe the IRS is going to like me talking about this but guess what, I don’t really care. I’m the advocate for small business. I’ve been doing this since I was 19 years old… I’m their friend – government is not so I’m going to do whatever I can to help.
My CPA is a principal at one of the largest accounting firms in the country, my lawyer has been practicing for 25 years. I went to them and I said ‘Punch holes in it, tell me… is this right or wrong?’
They both looked at me and said it is completely within the realm of the current law. My accountant didn’t think it was sustainable, he thought companies are going to have to hire people, and I said of course they are – but what if you can exchange the bulk of, or at least some of your would-be employees with this concept. My lawyer said technically it’s completely correct.
CC: So what made you want to help out fellow small business owners so much? Where is this creativity and passion coming from?
PB: We’ve got to do something to help our small business population; nobody’s helping us so we’ve got to help ourselves.
When you involve government with capitalism, it’s a cluster. It always has been and it always will be. It’s just like how government is interfering with crowd-funding right now. What was a great idea and was actually passed is now mired in controversy and legislation… it’s just a mess. Let business people stay with business people, let government stay with government. Do not mix the two – it is a recipe for disaster.
I’m just another entrepreneur out there just trying to help my fellow entrepreneurs. I am not a lawyer, I am not an accountant, I am just a fellow businessman who may have come up with a way to save a lot of time and trouble, and not to mention money, for my fellow entrepreneurs.