Work as a subcontractor? Hire subs to get your jobs done?
If you want to keep working in 2009, you’ll need to apply for a certificate to meet the requirements of a new state law.
Effective Jan. 1, all subcontractors must obtain an Independent Contractor Exemption Certificate (ICEC) from the Department of Labor and Industry. The cost is $150.
Without that document, the worker and the overseeing contractor can be fined up to $5,000. Plus, contractors will be required to pay back three years worth of unemployment insurance and worker’s compensation.
The new law is the government’s way of cracking down on those who are fraudulently working as independent contractors in order to avoid paying worker’s compensation, liability insurance and unemployment insurance, noted Dick Fredericks of aBest Tax Services.
Labor unions also supported the change in order to level the playing field and avoid losing bids to small companies that are able to undercut their prices, he added.
“If you work in the construction industry in the state of Minnesota and you are self-employed, you have to have this certificate,” noted Fredericks.
Are you a subcontractor?
The Internal Revenue Service (IRS) follows a nine-factor test to determine if a worker is an independent contractor or not (see sidebar on page ??).
It boils down to who is in charge. A subcontractor is given work to do, but not told when to do it, observed Fredericks. A subcontractor is paid by the job, rather than the number of hours it takes to finish the work.
Subs have their own insurance and their own equipment. They work per contract.
The Minnesota Department of Labor is beginning to actively seek out those who are dodging the law and cite them for violations, Fredericks noted.
Get incorporated
If you still have questions about whether you are a subcontractor or an employee, or if you don’t want to go through the hassle of obtaining the ICEC, Fredericks advises incorporating.
Businesses registered as limited liability companies or as corporations are exempt from the new law.
“Then there are no ifs, ands or buts if they are going to qualify for this exemption permit,” said Fredericks.
The cost of incorporating is a one-time fee of $160 to file with the state. (You do have to renew the incorporation every year at no cost, unless you’re late.) You must also pay to run a legal notice in a newspaper announcing your assumed name. The cost of hiring an accountant to handle setting up the corporation ranges from $250 to $1,000.
Fredericks noted that creating either an S corporation or limited liability corporation (LLC) would provide the same level of insulation for a subcontractor.
Clif Hilliard of Eagle Plumbing and Service in Cambridge chose to set up as a corporation rather than obtain the ICEC. When he started his company last spring, Fredericks advised him on his options.
“I just think it’s an easier way to go if you’re a contractor,” Hilliard said about his decision.
He doesn’t agree with the state’s decision to require this new permit, however, pointing out that operating as a sole proprietorship is a legal way to do business. “They should make it easier for people to be self-employed, not more difficult.”
Hilliard is facing the tough choice of not being able to continue hiring some of his subcontractors because they don’t have the certificate – and can’t afford to incorporate.
“This is going to affect a lot of people around here,” he noted.
Dave Oslund of Oslund Heating in Stanchfield has worked for decades as a local heater, obtaining jobs alone and through general contractors. His business is registered as a sole proprietorship. Each year, he pays the state a licensing fee to be a plumber, and he pays a fee to be bonded. He doesn’t understand why the state is requiring that he pay another fee and obtain yet one more license.
“I think it’s just another way for the state to get $150,” said Oslund.
Contractors can be fined
Contractors are responsible for checking to make sure that any subcontractor they hire has obtained the certificate. A list of those who have it is available online at www.doli.state.mn.us. Go to the Contractor License/Certificate Lookup Web page.
“If you have people not in compliance with the law, don’t let them work for you – just to protect yourself,” advised Fredericks. “It could easily cost you as much as you paid the person in salaries.”
To apply for the ICEC
To apply for the exemption certificate, contact the Department of Labor and Industry at dli.ic@state.mn.us or call 651-284-5074.
More information on obtaining the certificate is available at www.doli.state.mn.us. The certificate must be renewed every two years.
Who is affected?
Commercial and residential construction workers acting as independent contractors. For example, an individual who is roofing a house under contract with a licensed remodeling company would be affected. An individual roofing a house under a contract directly with the homeowner would not need an independent contractor exemption certificate.
Who does it not apply to:
Corporations, cooperatives, limited liability companies, or partnerships.
You are considered an independent contractor if you:
1) Maintain a separate business with your own office, equipment, materials, etc.
2) Hold a federal employer ID number or have filed business or self-employment taxes with the IRS.
3) Operate under contract to perform specific services for specific amounts of money.
4) Incur the major expenses related to the service being performed.
5) Are responsible for satisfactory completion of services.
6) Receive compensation for service performed under contract on a commission or per-job or competitive-bid basis only.
7) May realize a profit or suffer a loss.
8) Have continuing business liabilities or obligations.
9) Are successful or fail depending on the relationship of business receipts to expenses.
Get more info:
Browse www.doli.state.mn.us
Call 651-284-5074
Email dli.ic@state.mn.us
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