Question
My husband currently works for a general contractor as an hourly employee. The owner asked him yesterday if he would agree to change from an hourly employee to a subcontractor, due to license fees, bonding, taxes, etc. being too high. My husband does the design, building and install for a residential custom furniture builder.
We want to make sure, before we jump in feet first, that this is the right move to make, financially, regarding liability matters, etc. We need some advice on contracts between the GC and the sub, to protect ourselves. We are located in Ohio.
Forum Responses
(Business and Management Forum)
From contributor S:
One thing is, as an hourly employee, you get some benefits, but as a subcontractor you cover your own. That is probably why he wants to change - so he doesn't have to pay benefits.
The really bad news is that the GC has told you your husband's employment is "too expensive" - meaning he is already thinking about eliminating your husband's position anyway.
Another disadvantage is that subs everywhere seem to have trouble getting money out of GC's. There are many GC's that take advantage of the subs and use them as low interest or interest-free banks, drawing out payment 90 days or longer.
The advantages of being a sub are controlling your own schedule, being able to work with other GC's and do other jobs, certain tax advantages for owning your own business, and potentially making more money. By any measure, this is a big decision.
I see many good cabinetmakers who want to make a go for themselves. They have the skills to build a kitchen from start to finish. Word gets out about how such-and-such just went into business for himself. Before long, the phones are ringing and new orders are coming in. Then the scheduling problems start. Before long, there is such a backlog of jobs that customers get pissed off. There is no cash flow, because a job that a deposit was collected on isn't finished, so the customer is holding onto the balance. New employees magnify the problem because of training issues. The list could go on and on.
I knew of one drafter who went into business for himself. Within two weeks, he had contracted over 40 jobs. Problem is that he didn't understand budgeting and scheduling. His product was under-priced and his deposits were incredibly small. Within a couple of weeks he was broke. He simply didn't have the time to complete one job, much less 40 jobs.
Your current employer is merely shifting liability and costs to you, and probably won't pay you the needed 50-70% to make it worth your while. Also, if you use his tools, or if he schedules your time, in California you are not a subcontractor, you are still an employee.
If self employed, it also becomes your dime to provide for a retirement too. It could work out fine, but you will need a lot of other customers in addition to your current boss. He wouldn't be dumping this on you if he was doing that well financially in the current case. I'd look for other work.
Are you kidding me? If you are making $20/hr now, you will have to charge a minimum of $40/hr. And that is if you work out of your truck. If you need a shop, you will have to charge $60-$70/hr just to make enough to pay all the bills and make your wage and a small profit. I don't think you have looked at the picture that well. You will need all kinds of insurance, and there are fees, licenses, permits, taxes, and you get to pay the other half of the FICA, so instead of 7.5%, you get to pay the full 15%. Then you are going to need an accountant and possibly retain a lawyer, plus electric bills, heating bills, telephone bills. You have to spend time getting supplies and running around, which cuts into your "work" time. Expect to work an extra two hours a day and some weekends to make up for this.
Getting started up is a costly thing. Running the business becomes less costly as you go and learn all aspects of the business and no longer need your accountant and lawyers. If something goes wrong, guess whose money they are going to use to fix it? Yours. So if you think that $10 an hour is going to cover the business aspect of the business, you are not doing it legally. I am in Connecticut, so our pricing is outrageous. Maybe where you are located is cheaper, but it will still not be the $10/hr you speak of.
Either way, I was forced into the same situation. I started out with $22.50/hr 12 years ago and it wasn't nearly enough. Now I have my own shop and my own client and I still don't make a killing by any standard. I make a small profit and I usually burn that up by getting new tools to make my life easier. Eventually I will have all the tools that I need/want and can start on my bank account.
I hope the decision that you make works for you. But getting started is a tough thing to do. Especially with the housing market falling on its face like it is doing right now.
At a minimum, I would have your husband ask the employer to maintain his employment status and give your husband 90-120 days to get your ducks in a row to be able to transition to subcontractor, as he cannot rely on the former employer for all of his income once he becomes a subcontractor. If the employer cannot wait for 90-120 days for this transition, his situation may be dire...
Personally, if the employer is that concerned about insurance, etc. he has deeper problems to deal with and this might be a clarion call for your husband to find other employment.
Also, keep in mind that once your husband becomes a subcontractor, all those issues that the employer listed as the reasons for making the move now become your husband's to deal with - license, insurance (business/medical/dental/liability/auto), business filing, quarterly filing, taxes, social security, etc. - as well as finding the work to cover all these expenses. This does not include all the other issues that come with being self-employed including billing, sales calls, paperwork, late-pays, etc. (the list is quite long). Oh yeah, and that doesn't include doing the actual work itself.
Not trying to discourage your husband from striking out on his own, but there are so many aspects to running a business (even a one-man operation) that need to be taken into consideration that it's important to weigh all the pros and cons before taking the leap. The more prepared you are, the better... Contact your local SCORE rep, and meet with them to go over your thoughts. These are retired execs who do this for free.
Probably wishful thinking; at least it hasn't worked that way for me. I'll admit to being somewhat of a tool nut, but there is always something else I "need."
I agree with almost everything that has been posted. Getting started is not easy. Most people just starting out way under-price. There's a good reason small shops have to price at over $50/hr. I know I started out too cheap, may still be at $65/hr. If you can get the work, buy tools - they are cheaper than employees, and often more reliable!
Is his current employer a general contractor (engaged in new construction and/or remodeling), or is he what we call here a specialty contractor (is licensed, bonded, and insured like a GC, but limited as to types and scope of work - like a plumber, carpet layer, or cabinetmaker)? Or is he strictly a manufacturer of custom residential furniture? Second - is the scheme for hubby to continue doing the same work, in the same building, answering to the same person... just change his "official" status?
From what you've described, the IRS would not accept the relationship as one of contractor/subcontractor. There are lots of rules and qualifiers and formulas, but your situation doesn't come close to meeting the standard. Your attorney or accountant can confirm that for you - and if you're considering going forward with this idea, you'll definitely need both.
There are a lot more questions to ask before I could advise you intelligently, so I'll read between the lines and make some assumptions. You don't say that being a small businessman is something hubby has yearned for. If it's not - do not go there. It takes a lot of extra work, dedication, and a good dose of bulldog stubborn to succeed as an undercapitalized small biz. If you're not passionate about it, and if your spouse isn't 100%+ on board, the stress can rip your life apart.
If hubby plans to continue to do some work for his current employer, and develop additional clients, just remember that being a small business owner is an entirely different career (that requires a bunch of different skills) than being a designer/builder/installer of custom furniture. Doing both jobs at the same time takes time. One thing I always tell folks is, "Owning the business is great. You only have to work half days... and usually you get to pick which 12 hours."
