Are you actually an employee of a prop firm?

Discussion in 'Prop Firms' started by Nostradamus357, Jun 26, 2009.

  1. I may be wrong but it seems like it is misleading when a firm says you are an employee, but want you to sign an independent contractor contract. Am I missing something here?
  2. NevouS


    You're basically 'on contract' so self employed. even traders in ny/Chicago are on contract or brought in to 'partner' to get some of the tax benies. depending on how the corp is structured.
  3. Some firms yes, others no. Depends on the company and may also have to do with individual state laws.

    Majority are "independent contractor" nevertheless.
  4. mews



    As mentioned before in this thread, a lot of it has to do with taxes.

    If you trade at a prop firm and become a class b member then you are not really an employee but a limited partner of the firm.
    In this case you receive a K-1 from the firm and are not subject to self employment tax.

    If you are trading at a firm with no salary and just a split of profits and considered an independent contractor then you are also not technically an employee for the firm.
    In this case you receive a 1099 and are subject to self employment tax.

    I think that if you are a salaried trader for the firm and receive a W-2 from the firm, that is probably the main instance where you are actually considered an employee of the firm.
  5. Is this list is relevant and if so, do props follow them to a T?

    The twenty common law factors of a perfect independent contractor relationship are:
    1. No Instructions. Independent contractors are not required to follow, nor are they furnished with, instructions to accomplish a job.
    2. No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods to accomplish the work.
    3. Others can be hired. Independent contractors are hired to provide a result and usually have the right to hire others to do the actual work.
    4. Independent contractor's work not essential. A company's success or continuation should not depend on the service of outside independent contractors. An example violating this would be a law firm which called their lawyers independent contractors.
    5. No time clock. Independent contractors set their own work hours.
    6. No permanent relationship. Usually independent contractors don't have a continuing relationship with a hiring company. The relationship can be frequent, but it must be at irregular intervals, on call, or whenever work is available.
    7. Independent contractors control their own workers. Independent contractors shouldn't hire, supervise, or pay assistants at the direction of the hiring company. If assistants are hired, it should be at the independent contractor's sole discretion.
    8. Other jobs. Independent contractors should have enough time available to pursue other gainful work.
    9. Location. Independent contractors control where they work. If they work on the premises of the hiring company, it is not under that company's direction or supervision.
    10. Order of work. Independent contractors determine the order and sequence in which they will perform their work.
    11. No interim reports. Independent contractors are hired for the final result only. They should not be asked for progress or interim reports.
    12. No hourly pay. Independent contractors are paid by the job, not by time. Payment by the job can include periodic payments based on a percentage of job completed. Payment can be based on the number of hours needed to do the job times a fixed hourly rate. Payment method should be determined before the job commences.
    13. Multiple Firms. Independent contractors often work for more than one firm at a time.
    14. Business expenses. Independent contractors are generally responsible for their own business expenses.
    15. Own tools. Independent contractors usually furnish their own tools. Some hiring firms have leased equipment to their independent contractors so that they could show the independent contractor had their own tools and an investment in their business. This strategy won't work if the lease is for a nominal amount or can be voided by the hiring firm at will. The lease must be equivalent to what an independent business person could have obtained in the open market.
    16. Significant investment. Independent contractors should be able to perform their services without the hiring company's facilities (equipment, office furniture, machinery, etc.). The independent contractor's investment in his trade must be real, essential, and adequate.
    17. Services available to the public. Independent contractors make their services available to the general public by one or more of the following:

    1) having an office and assistants;
    2) having business signs;
    3) having a business license;
    4) listing their services in a business directory; or
    5) advertising their services.

    18. Profit or Loss possibilities. Independent contractors should be able to make a profit or a loss. Employees can't suffer a loss. Five circumstances show that a profit or loss is possible:
    1) the independent contractor hires, directs, and pays assistants;
    2) the independent contractor has his own office, equipment, materials, or facilities;
    3) the independent contractor has continuing and recurring liabilities;
    4) the independent contractor has agreed to perform specific jobs for prices agreed upon in advance; and
    5) the independent contractor's services affect his own business reputation.

    19. Can't be fired. Independent contractors can't be fired so long as they produce a result which meets the contract specifications.
    20. No compensation if the job isn't done. Independent contractors are responsible for the satisfactory completion of a job or they may be legally obligated to compensate the hiring firm for failure to complete.

    There is also a federal "safe harbor" rule which can exempt certain workers from the twenty common law factors. To be exempt from the twenty common law factors, a hiring firm must:

    have consistently treated the worker and similar workers as independent contractors;

    have filed all the required forms; and

    have had some reasonable basis for treating the worker as an independent contractor because there were similar rulings or court cases, or because it was an industry-wide practice or because prior tax auditors had never questioned the practices.

    If a worker clearly is an independent contractor, a complete agreement to that effect is useful and recommended; however, any agreement, no matter how well drafted and explained to each party and signed, will not change the results if a person is held to be an employee under the facts and circumstances.

    The laws surrounding the employee versus independent contractor issues are extremely complex and you should consult with a tax attorney on these issues.
  6. My understanding has always been that earnings for a trading activity for one's own account (i.e. independent trader) are not subject to self-employment tax, and this regardless of whether the trader claims the trader tax status or not.

    Here's an interesting article by Motley Fool on the topic:

    Quote "Because capital gains and losses are specifically excluded from the definition of "net earnings from self-employment," net earnings from a trading activity are not subject to the SE tax (IRC Section 1402(a)(3)(A))."
  7. When I traded for a private fund I was a independent contractor (this was in Connecticut if it matters). Anyway your list seems very stringent.

    As in my situation, I was trained on how to trade... I had no financial risk... and my income was structured according to a payout % based on performance.

    If people consistently lost money they can be fired whenever. No one hired any assistants or so forth.

    But this is my experience at one company, so it may be different in others. The rules were very relaxed.
  8. May I ask when it was that you began trading? Did they train you guys on stocks then or that and other financial instruments?
  9. Started ("professionally") in July 2008 and yes we traded equities... relatively simple strategy (no algos).

    It was a high frequency place where we were encouraged to scalp the big, highly liquid, 1 penny spread stocks (JPM, WFC, etc.). But we also traded stuff like Rimm, Appl, Xom... we tried to get many small profits instead of hitting home runs. We had freedom overall though.

    It was a good setup because we had no financial risk and weren't even responsible for commissions. Unfortunately, the fund was closed in March because of lack of potential. That's the cut-throat trading business.