Like many company owners, Richard Wibbelmann was caught off guard.
The owner of Maranatha Pool and Spa Service Corp. in Ventura,
Calif., had sold one of his routes to an employee, but the worker
didn’t have all the money upfront.
Wibbelmann allowed him to pay monthly installments for five years,
during which period all repairs and chemical purchases would be
channeled through Wibbelmann’s firm.
“The route was technically mine, because he hadn’t paid
me out,” Wibbelmann says. “If he all of a sudden split,
I’d be holding the bag, and the customers could go someplace
else without my knowing.”
To keep things separate yet still stay in touch, Wibbelmann also
set up a system where, for a fee, he took care of the books for the
new route owner.
Everything was fine until representatives from California’s
State Fund audited Wibbelmann’s books to make sure he was
accounting for all his employees. They noticed the independent
contractor’s name, and also saw that Wibbelmann hadn’t
been paying for his workers’ comp. insurance.
After a year-and-a-half-long ordeal, the agency decided the
independent contractor qualified as an employee, and charged
Wibbelmann $3,000 in back taxes, plus punitive fines.
He learned the hard way that the laws covering independent
contractors and workers’ comp. can be complicated. And if a
situation is borderline, state and county officials often will make
the call that benefits them.
In order to protect themselves, service technicians need a clear
understanding of the laws that govern independent contractors and
related taxes. Here, professionals discuss the rules that service
techs should know.
Hiring an independent contractor
For many service company owners, using an independent contractor
seems like a great deal. Technically, these workers are company
owners themselves rather than employees, they presumably rely on
their own expertise and supplies, set their hours, and don’t
Hiring an independent contractor frees the service company from
paying workers comp., Social Security taxes and other employment
So referring to somebody as an independent contractor, even though
he or she functions like an employee, may seem to be a perfect
But if government officials find out, they may very well think
“My last phone call was with a guy who owes the State Fund
$30,000 because some people who he regarded as independent
contractors are being classified as employees,” says Ray
Arouesty, president of Arrow Insurance Service in Simi Valley,
Some company owners think they can transform an employee into an
independent contractor by giving him or her a 1099 form rather than
a W-2 — even if that person works solely for them, under
their complete supervision.
But that alone doesn’t work.
“The 1099 does nothing,” Arouesty says. “They
really take a look at what they call ‘the nature of the
In the event of an audit, the government will check for signs that
the person truly does operate separately.
An independent contractor should possess any licenses required for
their specialty, rather than working under another company’s.
Items such as trucks, shirts, business cards and letterhead with
their own company logo also will help. In addition, before taking
on an independent contractor, it’s imperative to have them
show proof of liability and automobile insurance. And it’s
easiest if they aren’t working solely for one company.
But unfortunately, predicting how a state official may rule is not
a perfect science.
“Where … one state may find the party to be an
independent contractor, another may find the person or company to
be an employee,” says Eric Probst, an attorney and principal
at Porzio Bromberg and Newman in Morristown, N.J. “It’s
very confusing, the facts are multi-layered, and each instance is
What’s worse is that the penalties generally are the same for
those who made an innocent omission as for those who outright
flouted the law.
It’s also important to remember that there are ways to get
caught even if the government isn’t looking. An independent
contractor can get hurt and try to file a workers’ comp.
claim, or, if terminated, try to pull from your unemployment
insurance, which could spur an investigation.
Regardless of how or why it happens, the fallout will be
Working as an independent contractor
Unfortunately, service techs can’t merely pack a brush and
chemicals into a truck and call themselves an independent
To actually be self-employed, a service technician should start by
purchasing their own automobile and liability insurance. It’s
also best to register your company as a limited liability
corporation. This helps protect you and your family in case the
company gets sued.
“In the event of a lawsuit, the responsibility will lie with
the corporation [rather than the individual],” Probst says,
“In most cases, if you form a corporation you will be
protected from liability.” He adds that exceptions may be
made for company owners found guilty of consumer fraud.
Additionally, there may be times when independent contractors need
to purchase workers’ comp. Commercial clients often want to
make sure they won’t be held responsible for injuries that
your company sustains on their property. So even if you have no
employees, they may require proof of workers’ comp.
In California, independent contractors can purchase special
workers’ comp. insurance, called a minimum policy. It
won’t cover you if anything happens, but it provides you with
the paperwork you need to satisfy the commercial client that they
will not be held liable.
Service companies and taxes
Some service technicians and company owners find the issue of sales
taxes confusing. When is sales tax charged? When is it paid?
The fact is somebody has to pay sales taxes on the chemicals, parts
and equipment that techs purchase to do their jobs. Who pays and
how much depends on the situation.
When it comes to tools that are carried on and off a property
— brushes and the like — a tech must pay regular sales
tax. However, when dealing with items that are installed and become
part of the property, such as pumps and heaters, the tax can be
paid at a wholesale rate and passed on to the customer.
For anything sold to the homeowner that isn’t considered part
of the property, such as a bottle of chemicals, the government must
be paid based on the rate charged the customer. Repairs are a
special case. If more than 10 percent of the repair consists of
parts, then the tech should charge the customer sales tax at the
But this is where it gets a little messy.
“What typically goes on is guys will buy parts, mark them up
by doubling them, then sell them to the customer. But they
don’t bother to itemize the sales tax, and they don’t
send it in to the state,” says Bill Peck, owner of William
Peck Pool Services in Poway, Calif. “Now they paid
sales tax when they bought it, but they only paid on half of what
they sold it for. If they bought something for $10 and sold it for
$20, they paid sales tax on the $10, but legally they were supposed
to collect it on $20.”
When making purchases from a distributor, a service company can
avoid the extra charges upfront by filing a sales tax certificate
with the distributor. However, this also constitutes an agreement
to collect sales tax from the consumer — based on the retail
rate — and forward those monies to the government.
However, many areas don’t require sales taxes on services
such as repairs under a certain amount. If you don’t purchase
anything from the distributor for which retail sales taxes will be
required, you can just pay the sales taxes directly to the
distributor and you’re done.
The more likely reality, however, is more complicated. Most techs
pay some taxes at the wholesale rate for supplies needed to perform
services, and some at the retail rate.
Your best bet is to record every job along with how the taxes were
handled. This makes it easier to assess how much is owed when it
comes time to file the quarterly return.
“You have to set up your computer program so that it knows
which addresses are in which sales tax district,” Peck says.
And rates will likely vary from city to city, making the whole
situation trickier. But it has to be done. “I’m no
advocate of the state collecting more money,” Peck adds.
“But we’re all supposed to be playing by the same