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 need supervision.

Hiring an independent contractor frees the service company from paying workers comp., Social Security taxes and other employment fees.

So referring to somebody as an independent contractor, even though he or she functions like an employee, may seem to be a perfect loophole.

But if government officials find out, they may very well think otherwise.

“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, Calif.

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 relationship.’”

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 fact-sensitive.”

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 harsh.

Working as an independent contractor

Unfortunately, service techs can’t merely pack a brush and chemicals into a truck and call themselves an independent contractor.

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. insurance.

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 retail level.

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 rules.”