If you’re an employer, there are plenty of reasons to want to have independent contractors instead of employees. Here are just a few of them:
- Easier to pay,
- No payroll taxes,
- No workers compensation (sometimes)
- No unemployment insurance
- No pension matching, and
- No worries with controlled group status.
For the small business owner, making the step to having to meet the payroll requirements is so daunting it actually keeps some businesses purposely small.
Entrepreneurs are often so busy just working the business, they don’t have time to figure out what they need to accurate calculate deductions, matching payments, excess payroll taxes and who they need to register with and make regular payments to. There are payroll services, but they can be expensive when there is only one or two employees to track. It’s much easier to simply write a check. And the worker is often happier, at least initially, but his or her check is bigger.
The biggest savings though is in payroll taxes, worker’s compensation and the like. Some of the taxes, such as worker’s compensation insurance, may still be applicable if the worker becomes an independent contractor.
For a lot of my clients at USTaxAid Services, the biggest challenge to adding an employee is that they lose the ability to use pension plans such as the Solo 401(k) plan, which allows big contributions and the ability to self-direct. Once you add an employee, you can no longer use the Solo 401(k) plan. Also, any employees you add will need to be included on all of your benefit plans.
For most small business owners, this could mean that the cost of adding an employee is just too much.
Of course, the IRS and state taxing authorities would much rather see you have only employees because that means more tax revenue.
The bottom-line is if you end up with the independent contractor vs employee question, make sure you have carefully thought through the strategies and aligned the work requirements correctly so you have the right classification. You do not want to lose a challenge by the IRS when it comes to the Independent Contractor vs Employee question.