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Are Employees
Required?
Employment
Generally, employment occurs when an employer
engages the services of an employee for pay. An "employer"
can be any employing unit such as a sole proprietor, joint venture,
partnership, limited liability company, or corporation. An "employer"
can also include associations, trusts, charitable foundations, nonprofit
organizations, public entities, and other organizations. An individual
is determined to be an "employee" under common law rules or
by application of specific statues.
Who is an Employer?
Generally, a business becomes an employer when
the wages are consistent of remuneration for services performed, including
cash payments, commissions, bonuses, and the reasonable cash value of
nonmonetary payments for services.
Once a business becomes an employer, it must complete
a registration form, DE 1 and submit this form within 15 days to the
Employment Development Department (EDD). Employers are responsible for
reporting wages paid to their employees and paying unemployment insurance
(UI) contributions, and employment training tax (ETT) on those wages,
as well as withholding and remitting disability insurance (DI) contributions
and personal income tax (PIT) due on wages paid to workers.
Who is an Employee?
An "employee" includes any of
the following:
- Any officer of a corporation.
- Any worker who is an employee under the usual
common law rules.
- Any worker whose services are specifically
covered by law.
An employee may perform services on a less than
full-time or permanent basis. The law does not exclude services from
employment that are commonly referred to as day laborers, part-time
help, casual labor, temporary help, probationary, or outside labor.
Who is a Common Law Employee?
A common law employee is an individual who
is hired by an employer to perform services and the employer has the
right to exercise control over the manner and means by which the individual
performs his or her services. The right of control, whether or
not exercised, is the most important factor in determining the relationship.
The right to discharge a worker at will and without cause is strong
evidence of the right of direction and control. Other factors to be
taken into consideration are:
- Whether or not the one performing the services
is engaged in a separately established occupation or business.
- The kind of occupation, with reference to whether,
in the locality, the work is usually done under the direction of a
principal without supervision.
- The skill required in performing the services
and accomplishing the desired result.
- Whether the principal or the person providing
the services supplies the instrumentality’s tools and the place
of work for the person doing the work.
- The length of time for which the services are
performed to determine whether the performance is an isolated event
or continuous in nature.
- The method of payment, whether by the time,
a piece rate, or by the job.
- Whether or not the work is part of the regular
business of the principal, or whether the work is not within the regular
business of the principal.
- Whether or not the parties believe they are
creating the relationship of employer and employee.
- The extent of actual control exercised by the
principal over the manner and means of performing the services.
- Whether the principal is or is not engaged
in a business enterprise or whether the services being performed are
for the benefit or convenience of the principal as an individual.
- Whether the worker can make business decisions
that would enable him or her to earn a profit or incur a financial
loss.
The right to control the means by which the work
is accomplished is clearly the most significant test of the employment
relationship and the other matters enumerated constitute secondary elements.
In considering the factors, a determination of whether an individual
is an employee will depend upon a grouping of factors that are significant
in relationship to the service being performed rather than a single
controlling factor.
Who is an employee by Specific Statute
of Law?
A worker not considered to be a common law
employee may be a statutory employee by law for purposes of UI, DI,
and ETT under circumstances which include, but are not limited to, the
following:
- An agent driver or commission driver engaged
in distributing meat products, vegetable products, fruit products,
bakery products, beverages (other than milk), or laundry or drycleaning
services for his or her principal. The contract of service contemplates
that all services be performed personally by the worker. The worker
does not have a substantial investment in facilities used in performing
the services and the services are not in the nature of a single transaction.
- A home worker performing services according
to the specifications furnished by the person for whom the services
are performed on materials or goods furnished by the person for whom
the services are performed on materials or goods furnished by such
persona that are required to be returned to such person or a person
designated by him or her. The contract of services contemplates the
services are to be performed personally by the homeworker. The worker
does not have a substantial investment in the facilities used in performing
the services and the services are not in the nature of a single transaction.
- As a traveling or city salesperson, other than
as an agent-driver or commission-driver, engaged upon a full-time
basis in the solicitation on behalf of, and the transmission to, his
or her principal (except for sideline sales activities on behalf of,
and the transmissions to, his or her principal (except for sideline
sales activities on behalf of some other person) of orders from wholesalers,
retailers, contractors, or operators of hotels, restaurants, or other
operations, The contract of services contemplates that substantially
all the services will be performed by the worker personally. The traveling
or city salesperson does not have a substantial investment in facilities
used in performing the services, other than in facilities for transportation,
and the work in snot in the nature of a single transaction.
- A writer is performing services in employment
when a person contracts for the creation of a specifically ordered
or commissioned work or authorship. The parties expressly agree in
writing that the work shall be considered a work for hire, and the
ordering or commissioning party obtains ownership of all of the rights
comprised in the copyright of the work.
- Construction workers performing services for
which a contractor’s license is required are employees of a person
who is required to have a license, unless the workers are in fact
licensed. In other words, a contractor who hires unlicensed subcontractors
or construction workers is the employer of those workers or subcontractors.
Who is NOT an Employee?
Independent contractors are not employees. They
are engaged in separately established bona fide businesses. A bona fide
business is subject to profit or loss. They are usually contracted to
perform specific tasks and they have the right to control the way the
work is to be accomplished. They have a substantial investment in the
business and perform services for more than one business. Generally
speaking, they are anyone who is not an employee under the common law
rules unless they are statutory employees.
Are There Services of Employees that
are not Covered?
Services of certain employees are specifically
excluded by law and their wages are not subject to UI, DI and ETT. Examples
of such services include, but are not limited to the following:
- Family members such as a son or daughter under
18 years of age, spouse, or parent when the ownership of the business
consists solely of the parent or parents, spouse, or son or daughter
of the worker. All other relatives of the covered employees, wages
paid to all, relatives of the covered employees, and wages paid to
all relatives of the employer are subject to PIT withholding.
- Students under the age of 22 enrolled full-time
in an academic institution and performing services for credit under
a work experience program. Wages paid to such workers are subject
to PIT withholding.
- Direct salespersons (see EDD information sheet:
Salespersons, DE 231 N).
Now that we know what an employee is, the next
question is, "Does a corporation require an employee?"
If it were true that corporate officers are considered employees then
it would be accurate to say, "corporation will always have an employee".
So, since it is true the corporation must have employees, the next question
is, "where do you pay the withholdings tax for that employee?"
And when you pay withholdings tax, don’t you have to register with
the local workman’s comp authority? Which means you have to register
with the business license division! Here is the challenge with our competition
when it comes to giving you accurate information.
If the employees of your corporation
work in your home state, you must file for a local business
license* and with the necessary tax authorities in your home state in
order to pay the withholdings tax!
*Not all business requires licenses. About 95%
do. You must check with the city and county in which you are conducting
business to determine their requirements.
This leads to the simple fact, "You MUST
then register as a foreign corporation in your home state!"**
** You may even have to register as a foreign
corporation in other states if it is determined you are doing business
in that state and your corporation has sufficient nexus in that state.
Our competitors may respond by saying, "You
can be the independent contractor in your home state then you
don’t have to register as a foreign corporation". That leads
to several problems:
- As an independent contractor you are not
entitled to tax-free fringe benefits.
- If you are not the employee, who is
(if you have no employee you run the risk of being labeled a sham)?
- Also if you have no employee, and you pay yourself
as the independent contractor, you run the risk of the IRS reclassifying
all your income as W-2 income (that means back payroll taxes
and 100% penalties). The IRS never understands how independent
contractors operate corporations.
- If you did have someone else as the employee,
the question is "where is the jurisdiction of that employee?".
If it is not in Nevada, then that means it is somewhere else, which
means the corporation must register as a foreign corporation in another
state in order to pay the proper withholdings!
What about contracted employees?
Sometimes you may have this as a strategy. Meaning, you have no individuals
on the payroll, only other corporations. This means you operate a corporation
and all your administrative work is done through a second corporation.
So you have a situation which you think you have avoided the challenge
of having employees. This would work if the following criteria were
met;
- The first corporation owned 100% of the second
corporation (the second corporation was a wholly owned subsidiary
of the first corporation).
- The second corporation had employees on payroll!
In other words, in this example you would have
a situation where the corporations would be a parent-subsidiary controlled
group, and you would still have employees under the second corporation!
All this accomplished was a very complex situation, which did
not result in you being in any better position than when you started.
Of course, our competitors don’t quite explain it to you this way.
This is like getting only a part of the story. Basically, we get back
to the main point, the corporation must have employees. There
are a few exceptions. See other research on this site for those exceptions.
What about corporate officers? Typically,
when corporate officers perform work on behalf of the corporation they
should get a W-2 at the end of the year. Is it possible for an officer
not to get a W-2? Yes, if they did no work. For example, if someone
formed a corporation and made his wife the secretary, and she actually
did no work for the company, she would be a nonpaid corporate officer.
What do the other companies tell you about
incorporating in Nevada? They tell you that only the state
business license is required for the state of Nevada, if you do
no business in Nevada and have no employees in the state of Nevada!
That is true. The challenge is they don’t tell you the rest of
the story. That is, if you don’t have any employees in Nevada,
and you don’t do business in Nevada, where are your employees
and where do you do business? Odds are this is probably all happening
in your home state. Therefore you must register to do business in your
home state so you can obtain your local business license and start paying
withholdings for your employees. You should check with your local taxing
authority to make sure you are in compliance. Besides that, if you examine
the multistate taxation rules, you probably are considered to be doing
business in your home state!
Why don’t our competitors tell you this?
If you registered as a foreign corporation in your home state, you
would have to pay state corporate income tax in your home
state! And when you obtain your business license, your privacy
will go out the window! So, that would eliminate their top two
benefits for incorporating in Nevada. As you know, our reasons are much
more powerful and different for forming a Nevada corporation.
Here is what our competitors are telling you to
do, "Since you have a business that can be based from anywhere,
you need to establish your presence in Nevada with a bank account and
office. Then you only need a state business license because of
the preceding reasons (you don’t do business in Nevada). (If you
don’t do business in Nevada, where do you do business, in hyper-space?
That is why this makes no sense!)". Supposedly, now you can run
all your money through Nevada and pay no state corporate income tax!
This would only work in fantasyland! The bottom line is that you
are being misled!
Now, let’s assume you were going to have
employees based in Nevada. Then you should have all your nexus in Nevada,
complete with the office, bank accounts, complete business license,
and office address. Did you know that when you obtain a complete business
license in Las Vegas, that they require your name, SSN, address,
home phone and who all the owners are! So much for your privacy!
Again, the reason this issue is barely mentioned (the business license)
is that our competitors know that if you did these things properly,
most of their reasons for incorporating in Nevada would make
no sense, and their sales would drop by 75%!
And just because they have thousands of
clients and so called professionals doing it, don’t conclude they
must know something you don’t. Here is what happens: it is very
easy to convince people of something they don’t know much about.
It is much easier to convince new people about something they don’t
know anything about, especially when they have convinced thousands of
others that what they are telling them is true. They may have a few
"professionals" as clients, but I don’t think you will
find many clients from a Big Six Accounting firm, or a well respected
Tax Attorney, because they know better. Then our competitors will respond,
well, those people are conservative and we have the real "inside
information". A long story short is that our history is full
of examples of people who were misled into believing something which
later they found out not to be true! Many "intelligent"
people believed the world was flat for many years until someone named
Christopher Columbus actually checked it out! Please don’t be misled
by what our competitors are saying. Not all of them have
this point of view, but many do.
Notice: Concerning
the above tax comments, keep the following in mind:
- This is how
the above tax strategy works generally.
- This assumes
that you are running a business with an honest "expectation of profit"
and "that your expenses are ordinary, necessary, reasonable and directly
related to your business."
- You document
the deductions correctly.
How to Keep Your Business in the Top 5%!