Hiring independent contractors as opposed to employees will save you money. Being an independent contractor instead of an employee will save you money. It’s no wonder the IRS and Congress are dead-set against it.
Well, maybe that’s a little harsh. But the fact remains that there are a lot of benefits to hiring independent contractors instead of employees. You’ll pay less in taxes because you don’t have to pay payroll taxes. That means no Social Security tax, Medicare Tax, Federal and State Unemployment Tax but may means you’re still on the hook for Worker’s Compensation.
Still, you can figure that you’ll save an average of 8% by having an Independent Contractor.
Now let’s talk about benefits. Most benefit plans – health care, vision, dental, retirement and the like – require that you cover all employees. And while you may wish to provide benefits to everyone you work with, the sad reality is that for many small businesses there simply isn’t enough profit margin to cover it. So as a result, no one, including you the business owner get the benefits plans you want. One solution is to have independent contractors instead of employees. You are not required to provide benefits to independent contractors.
Before you jump out and turn all your employees into independent contractors (at least on paper), make sure you read this next sentence.
The IRS Wants You To Have Employees, Not Independent Contractors.
Why? Because you’ll pay more taxes. Consider that 60% of the taxes collected by the IRS come from employment taxes, they know that every independent contractor you hire means less tax revenue and that’s at a time when revenue collection has fallen.
Plus employment taxes pay, at least theoretically, Social Security and Medicare payments. Earlier this year the pendulum had swung so that for the first time ever, the pay-outs were more than was being received from collection. We knew it would happen, but it was anticipated that it would take until 2016 – 2020 for it to occur. The economic downturn and resulting job layoffs have meant a lot less in employment tax revenue. And now, at a time when the feds need every dime they can, they have to start funding Social Security and Medicare instead of the other way around.
The pressure to collect employment taxes has never been higher.
Bottomline: Having independent contractors will save you tax money, but you MUST do it right. That means following the new IRS rules (look for those on Wednesday’s blog post) and it means having a signed Independent Contractor Agreement.
You’ll pay less tax, but you also don’t want to invite trouble by incorrectly labeling an employee as an independent contractor.