By Bill Pirtle
Author and Business Consultant
In my 2012 book, Credit Card Processing for Sales Agents, Paul Rianda noted that ISOs typically consider expenses and control when deciding whether merchant level salespeople (MLSs) should be classified as independent contractors or employees. This article discusses the advantages and disadvantages of each status for MLSs.
If you own an ISO and want MLSs to punch a time clock, follow a designated process, complete training to your specifications, and be under your control; you'll want to hire them as employees, also known as W-2 agents. With this business model, you'll also need an HR department and/or payroll company.
If you want to avoid the expense of employees, bring MLSs on independent contractors, also called 1099 agents. Note, however, that you'll lose the ability to control their activities. Companies using both types of workers thrive with experienced and productive agents. But which is better for the MLSs?
New agents are normally better off as employees, which some see as a safer option. But W-2 agents typically don't receive a salary or hourly wage. Salaried positions that do exist provide training but offer little in residuals and require quotas and minimums. As employees sign deals, several companies offer them upfront commissions with lower commission schedules.
Employees must know when their residuals vest and what quotas are required for them to keep their positions and residual streams. Those who are mildly successful but not hitting quotas could be dismissed and lose residuals.
Other drawbacks involve control and long-term income. Long-term income is easy to evaluate. An upfront bonus plus 20 to 25 percent residual is great if you need income right away, but the 50 to 80 percent that is common for independent contractors can produce superior income over time. In addition, employees can be micro managed and be required to process everything exclusively through a designated processor, including supplementary products.
Independent contractors can represent several companies including card processors, gateways and POS companies. They can also buy their own terminals through a processor or distributor.
When it comes to taxes, employees have an advantage over independent contractors. Successful 1099 agents must file estimates and pay taxes quarterly. W-2 agents file annually, and their employers deduct money for taxes on their behalf. Employees, however, will have a surprise this year. I predict many will switch to independent contractor status for one reason: unreimbursed employee expenses. W-2 agents can no longer claim deductions for business expenses they cover out of pocket.
How big a deal is this? It will vary from agent to agent. Picture an MLS working out of his home, with cell phones and Internet and driving 40,000 miles per year. The 1099 agent can deduct expenses for the home office, miscellaneous expenses and mileage. With mileage rate at 54.5 cents per mile, the deduction for driving, alone, would be $21,800.
Another option worth mentioning for experienced MLSs is companies that offer employees a draw against commission. A couple of processors offer draw programs paying between $4,000 and $10,000 a month. This is not free money, but it exemplifies a willingness to invest in established MLSs that will deliver.
I have worked as both an employee and an independent contractor. If you are a newer agent who wants training, higher upfront bonuses or just wants to try out the industry, investigate W-2 opportunities.
Consider independent contractor opportunities if any of the following apply. You:
Like any major decision, consider the pros and cons before taking action. MLSs can do very well with either option. Choose the one you will love and thrive with.
Bill Pirtle is the author of the training book Credit Card Processing for Sales Agents. He has created a site for small business owners at yoursmallbusinessresource.com. He can be reached at 248-444-8009, on LinkedIn or via Twitter @billpirtle.
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