Friday, February 6, 2009

Avoid the Taxman

Consulting in the wine industry? Thinking about it? Well, be smart and make sure you are a true consultant in the eyes of the IRS.

When you are making a career change, or in between traditional jobs it is natural to think about consulting. It's easy to put out your own shingle and say you're a consultant. But before you venture too far into consulting, make sure you are handling your business correctly.

Companies use consultants in various areas. Wineries use consultants for winemaking, vineyard management, marketing, sales and many other areas. There are many opportunities for a skilled professional to carve out a healthy occupation being a consultant. Companies use consultants frequently to handle areas that they feel need special attention. If a winery owner doesn't know the ins and outs of a particular subject, they will hire a consultant to provide them with the information and often to provide a solution for a problem. While wineries do hire many regular, full time employees for the majority of their positions, hiring a consultant allows them some flexibility.

Okay, so you want to consult, and a winery needs you. To protect yourself and the winery from any potential IRS problems, here are some guidelines to manage your business. The IRS offers an online 12 point checklist for you to review that a client can use to make sure they are hiring a consultant. A consultant is a business person who is responsible for their own business, taxes and marketing. A winery does not have any responsibility to a consultant other than that outlined in a consulting agreement. The general rule of thumb is that a person is an independent consultant if the hiring company has the right to control or direct only the result of the work, not what the work is to be done or how the work will be done.

The basic items the IRS checklist covers are:
  • Behavioral Control: An independent consultant is not directed and controlled by the client. The client can only direct and control the work.
  • Financial control: As a contractor, you have a financial stake in the work, and will incur expenses that the client does not need to reimburse for. Also, if you can show a profit or incur a loss you are more likely to be an independt contractor.
  • Relationship of the Parties: As a contractor, you need to seperate your company as much as possible from your client company. You must maintain your own benefits, insurance and business. You are not an employee, and so you aren't entitled to the same benefits an employee is.
Why is this important? First of all you want to make sure you are handling your taxes correctly. Second, there have been rulings in the past where independent consultants did not meet these requirements, and were eligible to receive the benefits of a regular employee. Microsoft and several other large companies were found to be misclassifying regular employees as independent consultants. These were landmark rulings, and have caused independent consultants to come under scrutiny with the IRS. Clients can be leery of hiring an independent consultant. To see if you can really call yourself an independent consultant, employment lawyers have a 20 question checklist that you can review:

For the following questions, a "yes" answer means the worker is an employee.
1. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?
2. Does the principal provide training to the worker?
3. Are the services provided by the worker integrated into the principal's business operations?
4. Must the services be rendered personally by the worker?
5. Does the principal hire, supervise and pay assistants to the worker?
6. Is there a continuing relationship between the principal and the worker?
7. Does the principal set the work hours and schedule?
8. Does the worker devote substantially full time to the business of the principal?
9. Is the work performed on the principal's premises?
10. Is the worker required to perform the services in an order or sequence set by the principal?
11. Is the worker required to submit oral or written reports to the principal?
12. Is the worker paid by the hour, week, or month?
13. Does the principal have the right to discharge the worker at will?
14. Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?
15. Does the principal pay the business or traveling expenses of the worker?

For the following questions, a "yes" answer means the worker is an independent contractor.
16. Does the worker furnish significant tools, materials and equipment?
17. Does the worker have a significant investment in facilities?
18. Can the worker realize a profit or loss as a result of his or her services?
19. Does the worker provide services for more than one firm at a time?
20. Does the worker make his or her services available to the general public?

I know it is a lot to review, but it is good to know what is required, so that you can call yourself a true consultant. I am not a lawyer, but think the information is helpful. Let me know if I'm on or off base.

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