15760 Ventura Blvd, Suite 610 Encino, CA 91436
15760 Ventura Blvd, Suite 610 Encino, CA 91436
Personal, Affordable Payroll Services, Bookkeeping, and Tax Processing for Small Business throughout Los Angeles County.

Are Your Sales People Independent Contractors or Employees?

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It can be tricky to draw the line and know how to pay sales people


Maybe the oldest issue in the now festering issue of who qualifies as contract labor and who qualifies as an employee is the sales force. Dan runs a small manufacturing business and sells his products to hardware stores, locksmiths, and marine hardware businesses. For each business he has a different sales person.

For the hardware business he employs a rep company. There is just the owner, Sandy, on the company staff and she represents multiple lines. She doesn’t punch a clock, and Dan has no call on her time, other than he knows the Sandy will almost always give him plenty of attention when he wants to go with her on calls to customers and prospects. Sandy is clearly a 1099 independent contractor.

Then Dan needed someone to call on the locksmiths. He hired a Ed, a retired locksmith who was well known in the business. Ed only works a few hours a week out of his own home, has never been to the factory, and probably will never go there. He does most of his selling over the phone, but occasionally flies to see a customer or attend a trade show. Sometimes Dan picks up Ed’s expenses for a trade show based on a per diem plus expenses. He has one other line of products that he sells.

This is a slightly harder case. Both Ed and Dan want Ed to be a 1099 employee. Ed meets most of the criteria. He has other lines, even if just one. He doesn’t work out of the company office. He sets his own hours. Without giving a legal opinion, the IRS might see Ed as a W2 employee if the 2nd product line doesn’t produce much income. If they see that the second line is possible a hobby or a ruse, then they might determine he needs to be seen as an employee.

For the marine hardware business Dan found Edna. She was perfect for his business, as she used to work for the competition. She works in the office, but sets her own hours. On the other hand, Edna knows Dan wouldn’t be happy if she wasn’t working close to 40 hours. She drives her own car, but Dan pays her by the mile. She has no other product lines. She is paid 100% on commission. No base. No draw.

Dan would probably be smart to pay Edna as a W2 exempt employee. However, if her commissions don’t pay her at least the minimum wage, he could find himself arguing with the labor department. The fact that she has no other lines and that there is an understanding about putting in hours, and that she has a desk in the office, will likely result in a finding of employee, not contractor.

When you have employees and/or contract labor, you need to figure out how much they are due in payment, pay them, and then fill out all kinds of paperwork for the US and state governments about how much you’ve paid, how much you’ve deducted for taxes, and then you need to forward those deductions to the government agencies. This is a lot to ask of your staff. Send this work out to ATPP. We can do it so inexpensively that you’ll wonder why you ever did it in-house. Call 818-436-2775