Independent Contractors: Financial control

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Since so many homeschool organizations hire workers as Independent Contractors, it might be helpful to examine the difference between employees and independent contractors.

This is the second of a 3-part series on the definition of of independent contractor and  will examine one of the factors the IRS uses to determine worker classification: Financial Control.

The IRS has some helpful information on how to distinguish between an employee and an independent contractor at  https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Financial-Control

 Financial control refers to facts that show whether or not the business (or nonprofit organization) has the right to control the economic aspects of the worker’s job.

The financial control factors fall into the categories of:

  • Significant investment
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment

Significant investment

An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Unreimbursed expenses

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Opportunity for profit or loss

The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.

Services available to the market

An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

Method of payment

An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

 

Read the other factors that determine IC status:

Behavioral Control

Type of Relationship

And always remember:

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Still confused? Maybe my book, Paying Workers in a Homeschool Organization can help. It’s written just for homeschool leaders.

Or perhaps you prefer a private phone consultation. I offer a worker classification determination to help homeschool groups know if they are classifying their workers correctly.

Carol Topp, CPA

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Definition of Independent Contractor: Behavior

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Here at HomeschoolCPA, I get a lot of questions about the difference between employees and independent contractors (IC). Many homeschool organizations hire workers as ICs and wonder if they really should be treated as employees.

This is the first of a 3-part series on the definition of IC. I hope it’s helpful.

Lets start with Behavioral Control.

My source is straight from the IRS website: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Behavioral-Control

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into the categories of:

  • Type of instructions given
  • Degree of instruction
  • Evaluation systems
  • Training

Types of Instructions Given

An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

  • When and where to do the work.
  • What tools or equipment to use.
  • What workers to hire or to assist with the work.
  • Where to purchase supplies and services.
  • What work must be performed by a specified individual.
  • What order or sequence to follow when performing the work.

Degree of Instruction

Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Evaluation System

If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.

If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

Training

If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

 

 

Read the other factors that determine IC status:

Type of Relationship

Financial Control

And always remember this advice from the IRS (emphasis added)

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Still confused? Maybe my book, Paying Workers in a Homeschool Organization can help. It’s  written just for homeschool leaders.

Or perhaps you prefer a private phone consultation. I offer a worker classification determination to help homeschool groups know if they are classifying their workers correctly.

 

Carol Topp, CPA

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Are homeschool co-op tuition discounts taxable income? Probably!

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Carol,

I see a lot of schools (homeschooling co-ops, private schools, etc) that offer tuition discounts or reduction for parent volunteer hours. If a parent volunteers to teach a  class a few hours a week and receives a tuition reduction for this commitment, is this considered taxable income for the parent?

I have also read this:

“IRS has broadly interpreted a worker’s “compensation” to also include the amount of free or reduced tuition that is given to a parent in consideration for his or her service to the school or church. A worker is no longer considered to be “volunteering” if he or she receives something of value “in kind” for his or her service. In the situation of a working parent whose child is enrolled in the school, it is the student’s waived tuition amount normally charged to nonworking parents that will constitute the worker’s taxable wage amount.”

I would love any follow up information you have about this. Thanks again!

Joanna R.

 

Dear Joanna,

I read the quote you provided with a lot of interest. I did a little research and came across IRS Publication 3079 which, although its title is “Tax Exempt Organizations and Gaming,” had a helpful section titled, “Volunteer Labor”

It stated something I didn’t want to read,

“Compensation is interpreted broadly. A worker who obtains goods or services at a reduced price in return for his services may be considered to be compensated.”

 

When the IRS says “compensated,” they mean taxable income. Ugh! That could mean that hard working volunteers in a homeschool organization, who get a discount on tuition, could have to report and pay taxes on this “compensation.”

But, as with all IRS documents, I kept reading Publication 3079 and found this:

On the other hand, a worker who receives merely insignificant monetary or non-monetary benefits is considered a volunteer, not a compensated worker.
Determining whether a benefit is insignificant requires consideration not only of the value of the benefit but also:
•The quantity and quality of the work performed;
•The cost to the organization of providing the benefit; and
•The connection between the benefit received and the performance of services.
(emphasis added)

 

So, if a co-op gives an insignificant monetary benefit to its volunteers, it is not taxable income. The IRS does not define insignificant, but here ares two examples that might help:

Insignificant benefits to a volunteer
A volunteer teacher was given a $50 discount off her $250 tuition for teaching a class. She put in a minimum of 30 hours preparing and teaching this semester-long class. That’s is an hourly rate of less than $2/hour. That seems pretty insignificant to me! It cost nothing for the co-op to offer this benefit. The co-op offered this discount as an incentive to increase volunteerism and it was not payment for services.

Significant benefits are taxable income
Another co-op gave their director several thousands of dollars in gift cards to grocery stores and Target, gave her children free tuition worth $1,500,  waived all field trip fees, theater ticket fees and registration fees amounting to hundreds more in benefits. These were NOT insignificant and were compensation for her services. The co-op thought that by giving gift cards and reduced tuition they could avoid payroll taxes and the paperwork of hiring and paying their director as an employee. They were wrong! The director should be treated as an employee. She should report all these benefits as taxable compensation.

Conclusion
Homeschool leaders should determine if the benefits of reduced tuition of fees they are giving to volunteers are insignificant. Look to the IRS guidelines in IRS Publication 3079 listed above. If the benefits are significant and are compensation for services, then it needs to be reported as taxable income to the worker/volunteer.

I can help you determine if your fee waivers or discounts are “insignificant.” Just contact me.

My ebook Paying Workers in a Homeschool Organization can help you determine the paperwork and reporting for workers.

Carol Topp, CPA

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Is this a gift or compensation to a homeschool leader?

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I just purchased your e-book, Paying Workers in an Homeschool Organization.   It only briefly touched upon the issue I am most interested in, and I am wondering if you have additional resources to answer my question.

Our Steering Committee decided years ago to provide certain gifts and perks to our chairman whom they were in danger of loosing due to her family suffering financially at the time.   The financial hardship has passed, but the gifts and perks remain. Currently, our chairman receives these annual benefits:

  1. $1,000 in gift cards (usually grocery and gas gift cards)
  2. $700 in classes for her children – these are the fees paid directly to the independent contractor teachers
  3. $100 -200 in waived registration fees (These are fees that the co-op charges members.)
  4. $160 in free pizza/drinks/snacks
  5. reimbursements for costumes and drama-related costs for her children (all other members pay for these)
  6. $300-$500 in cash gifts collected from members and given directly to the chairman.

She is the only one to receive gifts and perks out of the co-op budget.

This has been a very difficult conversation at our co-op because our chairman does do an enormous amount of work.

Thank you!

Anne in PA

 

Anne,

When I read the list of “perks” your chairman receives I was shocked! Wow!

Most board members are happy with flowers or a small gift card.

According to the IRS,  an officer who is paid is an employee. That means the gift cards, tuition discounts, and cash she received should have been reported to her on a W-2 and your group was supposed to pay employer taxes (SS/Medicare) on her “wages” and file quarterly tax forms with the IRS!

When you pay independent contractor teachers on her behalf, you are paying her personal expenses. The IRS considers payment of personal expenses as taxable compensation and it needs to be reported on a W-2. See  http://www.irs.gov/pub/irs-tege/eotopici93.pdf

My recommendation is to stop these excessive payments immediately. The IRS calls this “excess benefits” and can impose penalties and a 25% tax on what they deem “excessive.”

Here’s an excellent article on excessive benefits (they consider paying personal expenses for members of an officer’s family to be “excessive.”)
http://www.nolo.com/legal-encyclopedia/reporting-excess-benefit-transactions-the-irs.html

Here’s what they recommend:

If your nonprofit discovers an excess benefit transaction with a DP (disqualified person; i.e. , an insider or leader), it should make good faith efforts to correct it. To do this, you must have the disqualified person repay or return the excess benefit, plus interest, and then adopt measures to make sure the same situation doesn’t occur again. The IRS will take into account these efforts in deciding what penalties to impose and especially whether to revoke the nonprofit’s tax exemption. (emphasis added)

You can, of course, start paying her a salary that she will report as taxable income to the IRS. My new book Paying Workers in a Homeschool Organization can help with that!

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Should my homeschool co-op be giving any tax forms to our teachers?

Form 1099-MISC for 2010 with calculator and pencil on it

Hi Carol,

I had someone ask if our homeschool co-op will send them a 1099 for payment we made to her this year.  To the best of my knowledge, we have never done this before.  Is this something we should be doing?  Is there a guideline for how and when to do this?
-Trish

If you paid an individual more than $600 for their services in a calendar year, you are supposed to give them a Form 1099-MISC and a copy goes to the IRS.

You do not have to provide 1099-MISCs to corporations or for goods you purchased or for reimbursements of expenses.You only give 1099-MISC to individuals who you paid for hired work.

It’s a good practice to collect the legal name, address and SSN from every person you pay for their services before paying them. Use IRS Form W-9.

I use a service Yearli.com to prepare the Form 1099-MISC. They charge about $5/form, mail a copy to the recipient and to the IRS. It’s very easy to use.

The 1099MISC is due to the recipient and the IRS by January 31 each year.

My new book Paying Workers in a Homeschool Organization can help  you understand all the rules and tax forms for independent contractors.

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Can a teacher work off their tuition to a homeschool co-op?

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We have recently started an inclusive homeschool co-op. I have three of your ebooks and I’m a bit confused on a few issues.

1. Each family pays the outside teachers directly. We do a registration process, but the cash or checks go to the teacher, not the co-op. Do we mark that money “in the books” or is that outside of co-op money?

2. I am also confused with the differences between volunteer parents teaching a class for reduced fees for classes and  an Independent Contractor working off their tuition.

What am I missing?

Thank you so much for your time,
Heather

Heather,
Thank you for contacting me. To answer your questions:
1. Since the funds never come to your group, they are not recorded in your books as income to your group.

2. Volunteer vs Independent Contractor (IC). It’s a world of difference because an IC is not supposed to receive any fringe benefits such as free or reduced tuition. If you give an IC fringe benefits, then they are an employee and you need to set up payroll, pay unemployment taxes, workers comp, SS/Medicare taxes, etc…The IRS is very clear and very strict about ICs not receiving benefits.
Employees of educational institutions can receive tax-free tuition discounts. Colleges and private schools do that a lot for their employees.

On the other hand, a volunteer can receive reduced or free tuition as a nontaxable benefit if it is insubstantial. If the free tuition is substantial, then the IRS would consider this compensation and the volunteer should report it as taxable income on her tax return. Read more about insubstantial benefits to volunteers.

This explanation may help:
(this is from an article “Money, Taxes and Your Homeschool Family” in the March/April edition of The Old Schoolhouse magazine. Read the full article here: http://ow.ly/uAkhI

Teresa, a homeschool mom who teaches at a co-op where her own children take classes, was told by her co-op that they would just deduct her co-op tuition from her income as a teacher. Teresa’s co-op paid her as an independent contractor and this arrangement didn’t seem correct to her.

Fortunately, she emailed me, asking, “Can I work off my co-op fees by teaching a class?”

The answer is no, you cannot.

The homeschool co-op should pay Teresa with a paycheck. Then, as a separate transaction, Teresa should pay her fees to the co-op. It is important to separate the two transactions because of taxes. Being paid for teaching is earning taxable income. Paying tuition is a personal expense and not tax deductible. The two do not negate each other for tax purposes.

It may seem like more work for the co-op’s treasurer to pay and collect money from the same person, but the separation is important for clarity and correct reporting of taxable income to Teresa.

I hope that helps explain the difference.

My new book Paying Workers in a Homeschool Organization can help homeschool leaders understand how to properly set up compensation for volunteers and Independent Contractors.

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Is a homeschool tutor an employee of the family who hires her?

Teenager&Teacher

I am hoping you can help me. I recently got hired as a homeschool teacher. I am reading articles that say I am not an independent contractor and this is really concerning me. I am hearing that I am an employee and to do things legally my employer has to fill out all this paperwork.

I want to be legal, but I don’t want to burden my new employer with all of this.

She did give me materials, an hourly wage and the times she wants me to come over.
Thanks,
Stephanie

Stephanie,

Thank you for contacting me. Worker status as an employee or independent contractor is a difficult and confusing issue.

What the IRS says about worker status
The IRS says that the facts and circumstances of each situation determines the worker status, not our desire to avoid paperwork and taxes(!). But they are the IRS, so of course they will say things like that!

What to do as a independent contractor
In practice, you and the family who hired you need to have a common understanding of your employment situation. If you agree to be an IC, then make sure you act like one. Have a written agreement stating you agree to do a certain job for a certain amount of pay. Both parties should sign it. Invoice the family on a regular basis listing the times and hours you worked for them. Make sure the family does not tell you how to do your job; you should already know how to do your job. You should also bring your own tools and supplies, although the student can have their own school supplies and books as well.

I think it is also fairly typical for private tutors to be ICs rather than employees. You are much like a piano teacher who agrees to go to a family’s home to teach. The IRS has a tendency to look at industry practice when determining worker status.

You cannot avoid some paperwork
Make sure the family gives you a 1099MISC and you report the income on your taxes at the end of 2014. You should also fill out a W-9 form Request for Taxpayer Identification Number and give it to them, so they have your legal name and SSN.

All these practices will help confirm your worker status as an IC, rather than an an employee.

I hope that helps.

Carol Topp, CPA
HomeschoolCPA.com

Homeschool co-op has a super volunteer. Can she be paid?

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Hi Carol,

Our co-op is a nonprofit corporation. Almost all of our tutors in the co-op are moms with kids in the program. The moms do not get pay in money for teaching but are offered “credits” against tuition.

1) Are we correct to assume that we are not dealing with either Independent Contractors (IC) or employees in this circumstance?

2) We have one tutor who gets “credits” and payment. Can we regard her as an IC if she submit an invoice?

We do have a few tutors whom we pay and we will need to look more closely into invoices and 1099 MISC.

Thank you so much for your advice. If these questions are covered in your ebook, please let me know.

-MG

 

Dear MG,

Thank you for contacting me. Let’s see if I can answer your questions.

1. Sounds like your tutors are volunteers. You thank them with tuition discounts (or “credits” as you call them). The more a person volunteers, the larger the discount/credit. There is no problem with doing that, except the “credits” are really a form of compensation for her services and are taxable income to the recipient. Your”volunteers” won’t like hearing that news!

Paying a Volunteer

2. Paying a volunteer gets very tricky. She’s no longer a volunteer because she is paid. She’s actually a mix; some volunteer and some paid. That’s what’s confusing. If you can clearly separate her volunteering from her paid tasks, then do that. For example, if she tutors and gets credits (which are taxable compensation) and then in addition designs your website for free, it’s pretty easy to separate those two jobs.

Super volunteers

But some people are what I call “super volunteers.” They volunteer so much beyond their discounts or credits that the organization pays them for their extra volunteering. But volunteers cannot get paid, so she’s either an employee or an IC.I cannot determine her worker status with the information you gave me.

If you want to treat her like an independent contractor, then she cannot receive benefits like tuition credits. The value of these credits need to be reported to the IRS and added to her taxable income.
I discuss this in Money Management in a Homeschool Organization. See Chapter 12.

Cover Money Mgmt HS Org

The Money Management book will be helpful and so will my Paying Workers in a Homeschool Organization book, because it shows the forms needed for employees and Independent contrcators.

 

Carol Topp, CPA

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Is a homeschool co-op teacher an independent contractor if paid by the parents?

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After reading through a bit of your material, we have decided that each family will pay our homeschool co-ops teachers individually. How would we label teachers that are not on a payroll, not volunteers, and not an independent contractor of the co-op?

The way we look at is that we simply provide a space and venue for outside teachers to offer their services. Is this correct? Our group will not provide them with any money. However, the group plans on “negotiating” the per student cost of a class.

Thank you for your insight
Heather

Heather,

Thank you for contacting me.

Teachers that are not your employees are called independent contractors IC), hired by each parent, but not the co-op.

I think you explained the arrangement correctly.

I recommend you have a written statement explaining what the co-op will do and what you will not do for the ICs. Have each teacher sign it. Call it a Memorandum of Understanding (MOU). MOU’s are not legally binding and do not involve an exchange of money. They are different from a contract in that way.

Be careful about too much negotiating with the teachers. You don’t want to give the appearance that they are working for your co-op. You could certainly tell them a typical fee that parents would be willing to pay, but ICs are supposed to bear the risk of doing business which includes setting their price. In other words, help them by offering a suggested range of fees, but do not dictate what they can charge.

 

Cover Money Mgmt HS OrgHave questions about paying teachers in your homeschool co-op? My latest book, Money Management in a Homeschool Organization will help. I devote a chapter to hiring workers.

Order a copy today.

You may also find these two podcasts helpful:

Paying Workers in a Homeschool Organization Part 1

Paying Workers in a Homeschool Organization Part 2

 

Carol Topp, CPA

Paying Workers in a Homeschool Organization Part 2 podcast

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Do you pay workers in your homeschool organization?

Do you know what form to to filing with the IRS?

Homeschool CPA, Carol Topp, will share the details of what you need to know about paying workers in a homeschool organization in this 30 minute podcast. Part 2 of a 2 part series.

Listen to the podcast

 

Show Notes:

Applying for EIN. Use IRS Form SS-4. Read this helpful article first Getting an EIN from the IRS.

IRS forms to give to independent contractors (IC).

  • Use IRS Form W-9 to collect the IC’s legal name and EIN.
  • Read IRS Pub 15A Employers Supplemental Tax Guide.
  • Give Form 1099MISC to every IC paid more than $600 in a calendar year. Unfortunately Form 1099MISC cannot be printed on your home printer. You must order it from the ITS or buy a set at an office supply store. I use FileTaxes.com to file and mail Form 1099MISC.

IRS forms to give to employees

  • Collect a W-4 and an I-9 (Immigration) from each employee. Get employment forms at IRS.gov
  • Read IRS Pub 15 Employers Tax Guide
  • Give each employee a W-2 at the end of the year. (I use FileTaxes.com to file and mail the W-2’s to the employees)
  • Form 941 or 944 to pay your employer taxes (Social Security and Medicare). Find employment forms at IRS.gov.  I use FileTaxes.com to prepare and file 941/944 or fill in online print and mail.

What to do if you are paid by homeschool organization an receive a 1099MISC

  • File Schedule C Profit or Loss from Business of the Form 1040. List all your income and expenses from being a independent contractor.
  • Pay federal income tax and  self-employment tax (same as Social Security and Medicare for self-employed people) using Schedule SE (attached to your Form 1040.

If you find these forms confusing, consider a private consultation with Carol Topp, the Homeschool CPA. She can help you prepare and file the correct forms.
Carol mentioned a few helpful resources:

Cover Money Mgmt HS Org

Paying Workers in a Homeschool Organization (short ebook)

Questions and Answers for Homeschool Leaders (ebook)

Money Management in a Homeschool Organization (newly expanded) in paperback or ebook. The Paying Workers ebook is incorporated as a chapter in this book, so you don’t need to purchase both.

Other helpful books and articles for homeschool leaders can be found at HomeschoolCPA.com

 

Be sure to listen to the first part of this podcast (Episode #17) where Carol explains the difference between employees and independent contractors.