Benefits of Independent Contractor Status (vs Employee)


This post is in: Business
6 Comments

10-12-2010-1

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.



6 Comments

  1. Tom Jones says:

    Dear Diane

    I do not think that the IRS cares either way whether the business has employees or IC. I think what they do care about is that the subject is classified properly. According to the blog by Tom Butler, I agree, it is not up to the business. The nature of some business simply will no accomodate IC, however, greedily they proceed. While you may be an attorney and have expertise in this area, so do I. I have been a contractor, by various industries, or at least classified by there means as an IC; to date I have challenged the status with the IRS and have 5 misclassified rulings against the business. The majority of the people in my position don’t mind being misclassified; they’re paid more (so they think); they can work their own hours (so they think). The businesses like it because, like you said, it more cost effective to pay a marginal higher wage, than pay FICA, SSI, State and Federal Unemployment Insurance and not to mention, worrying about a Worker’s Comp claim, however, both parties make harsh mistakes in their assumptions. If a party continues to partake of a IC status for the major part of his/her life will suffer consequences in the ends, thus providing they are Warren Buffet or Bills Gates clones. In the end, they will find themselves in a situation requiring either unemployemnt, WC or SS, to no avail. The businesss, the wise old fox that he esteems himself to be say “No not me, they’ll never challenge me” will find himself up to his wazoo in legal fees defending his classification. I disagree with you.

  2. Diane Kennedy says:

    Tom, I think this is going to be an even bigger problem in the future.

    Without a doubt, there is some real fraud here too. I’ve seen people (NOT my clients) just move all their employees to IC status to avoid the tax and benefits, but they never changed the job classification. You can’t do that.

    Great benefit IF you follow the rules and like you said, when the IRS is targetting something (like they are this), it can be tough if you’re the one under the microscope.

  3. Tom Butler says:

    Good article, but you didn’t emphasize the risks enough. THE DECISION ON WHETHER SOMEONE IS AN INDEPENDENT CONTRACTOR BELONGS TO THE IRS, NOT THE BUSINESS!!!

    Worker classificiation is a big audit target right now…our firm has seen that from personal experience. The IRS position is that you’re an employee until proven otherwise, and it’s the “proven otherwise” hurdle that’s tough to overcome.

    PLEASE follow up with warnings in that regard. Yeah, there are advantages with independent contractors, but God help you if you misclassify!

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