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It's a Matter of Integrity
As a business owner, you must know, understand and abide by all the local, state and federal laws.
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A few years ago, I used to ask attendees in my seminars to write the number of years they had been in business on the back of their business cards. One time when I asked for this information, a lone voice inquired, "Legally?" Most people laughed, but actually it emphasized the fact that too many people in this business are operating illegally. This is something that has bothered me for quite a long time. It was brought to my attention again by a friend at a recent trade show. She, a legal employer, was appalled at the number of attendees with whom she conversed who are paying their employees "under the table." Soon after that, another person spoke to me about it. The more I thought about it, the more I decided it was time to address this subject. Today, as I planned to write this article, I first checked my e-mail. Guess what? Yet another person was upset by this too-common situation.
INITIAL LEGAL INVESTIGATION Anyone who offers a service or something for which they will receive money must find out what the law requires of them before they accept that first dollar. Then they must abide by those legal requirements even if their business or service is only a one-person shop. Many of those who have never been in business before don't know they need to do this first. I didn't. And unfortunately, if certain laws are broken, ignorance may not be bliss! The first two things you need to do is to decide on a name for your business, then go to or call the city (or county) hall and ask who you need to see about the requirements for starting a business.
NUMBERS AND LICENSES You will need a federal identification number (probably your social security number for a sole proprietor), a state sales tax number and the rules to determine for which products or services you must charge sales tax. This can be a very sticky issue in dealing with customers who don't understand the tax law. I advise keeping the rulebook handy and marked to the correct page if your state requires you to collect tax on fabrication. If you are a wholesale workroom, you also will be required to have your clients fill out a tax exemption form with their tax number if they are to resell your products. Most likely your city, county and maybe your state will require a license. My county bases the license fee on a percentage of my previous year's gross and on what type of business I have. There may be other taxes or requirements of your locale that might be overlooked. I used to have a business in the city, and we had to pay a litter tax.
ZONING Zoning is another major issue to check on. When I started my business, I lived in the county and, as I said before, I didn't know enough to check the laws. I decided to hire an employee, and the first day she came to work it hit me that I may not be zoned to have employees. I called the county government and discovered I was zoned as agricultural and could not have employees. So I ended up firing my first employee on her first day of work!
INSURANCE One of the most important needs of any small business is insurance, and it is important to find an agent who knows something about your business or who wants to learn all he can about your business. I attended my local Window Coverings Association of America (WCAA) chapter meeting when we had an insurance agent speak. I was astounded at what my own agent never bothered to ask me. In many cases, you can now add a rider on your homeowner's policy that will be adequate. But in some cases you have to have a separate policy, which is my case. I also learned in this seminar that if your sub-contractors do not have liability insurance and they cause damage, you are liable for it! If you are an employer, you must provide unemployment insurance and worker's compensation to cover an employee who might be hurt on the job. If you were in your employee's shoes, how would you feel if you were hurt and had no benefits? Suppose you have to lay off an employee just because you don't have enough work and they go to collect unemployment. Or suppose you have a disgruntled employee who pays a visit to the state employment office. Guess whose cat is out of the bag then?
NON-LEGAL EMPLOYEES Hiring employees brings on a whole array of responsibilities, obligations, rules and taxes, and I certainly can't go into all of them in this column. The rub to your peers in the industry, and indeed to all Americans, is in willfully not fulfilling all your legal requirements. When you pay employees under the table, you are not just breaking a federal or state law; it goes beyond that. Yes, there are many taxes and fees you must pay the government when you have a legal employee, but please consider what you are doing to that employee. You are depriving (actually robbing) that employee of her social security benefits, which she will need in retirement. More than likely she doesn't even realize that this is the case. Legally, an employee must contribute a certain amount from her paycheck to social security and the employer must match it. Even if she invested her part of social security, she is being deprived of your matching funds.
EMPLOYEE OR INDEPENDENT CONTRACTOR There are many of you who don't even know you have employees. Just because you take some of your fabrication to someone who works out of her home and not at your place of business does not necessarily mean the IRS considers her an independent contractor. If that person sewing for you is not licensed and insured, does not sew for anyone else, and is subject to your exact specifications on the methods of fabrication, you may have cause to be concerned. The IRS has an excellent explanation of how they determine who is and is not an employee on its Web site. Go to www.irs.gov, search for "employee," and look for #21 Publication 15A: Employer's supplemental tax guide; #2, Employee or Independent Contractor? They give so many examples, that you are very likely to find one that will fit your circumstances exactly. If you still are not sure or do not have access to the Internet, you can call your accountant or the IRS and ask for this information.
'Honesty is the cornerstone
B.C. Forbes
CAN'T AFFORD TO BE LEGAL A common reason for not operating a legal business is, "I can't afford to pay all those taxes and fees!" Yes, you can! When you figure out how much extra each employee is going to cost you, raise your prices! I'll bet you've heard that before! The U.S. economy expects every employer to charge a fair price to cover all the expenses required to be legal. If you haven't tried charging what you need to charge to be legal, then how do you know if people will pay it or not? Remember, you are an example to your family, especially to your children, and the industry. Not paying the government what you should is the same as being a pickpocket. You may think it's petty, but if you are caught the IRS could take everything you have for back taxes.
SOLUTION You might also think you don't have time to figure it all out. That is why I repeatedly recommend that you have an accountant. Let him or her do that for you, and include that cost in your raised prices! However, there is another more attractive solution. You can have a temporary agency hire your employees and then you hire them from the agency. That would be considered working with an independent company. It would not lower your cost for taxes, but it would save you the time and expense of hiring your accountant to handle everything. You wouldn't even have to take time to write their paychecks! It also has the benefit that you can fire your employees anytime without having to answer to the unemployment office. Another benefit of using a temporary agency is if you are zoned somewhere you cannot have employees. My accountant tells me that using employees from a temporary agency would not be considered as having my own employees. If you plan to do this, check with your accountant first to be sure the same is true in your area.
IT'S THE AMERICAN WAY Someone just pointed out to me that paying the legally required taxes and fees to our government, whether state or federal, keeps it strong and financially solid. America is the land of opportunity where anybody can become an entrepreneur and succeed with hard work and diligence. In fact, in view of the horrible events of September 11, we all should want to give what we can to our government to take care of the thousands of people who have been financially affected by those events. When it comes down to it, it's just plain patriotic to pay your fare share for all the services the government of this land of the free offers! If you think no one knows or cares whether you are operating illegally, I suggest you meditate on that.
If you have any questions or comments about this article, previous articles or any topic of interest to workrooms, please contact me at: Workroom Operations |
| DWC Magazine | Index to Articles | Back Issues | November'01
Kitty Stein, WCAA, is a 20-year veteran of the drapery workroom field, having owned and operated her own business for 18 years and having taught classes on window treatment construction. Until 1990, Stein and a partner owned a workroom with nine employees. She since has opened her own smaller workroom, Workroom Concepts, that has just one employee. She also does workroom consulting, seminar speaking and is the author of Order in the Workroom available through Draperies & Window Coverings and Price Your Work With Confidence.