If you’re an employer, you may have already discovered that there are plenty of reasons to have independent contractors instead of employees.
An independent contactor means:
- It’s easier to pay them,
- You don’t owe payroll taxes,
- You don’t have to pay workers compensation (sometimes – check this for the rules in your area),
- You don’t have to pay unemployment insurance,
- You don’t have to fund a pension, and
- You can pay yourself benefits as an owner/employee and not have to cover all your workers.
There’s another reason. It’s hard to calculate payroll and payroll taxes.
In fact, this one change can 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 payroll deductions and taxes, match pension and Social Security payments, calculate excess payroll taxes and know 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 to be paid as a Form 1099 worker because his check is bigger with no payroll taxes deducted.
The biggest savings for the employer 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.
Of course, the IRS and state taxing authorities would much rather see you have only employees because that means more tax revenue to them.
The bottomline 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.
Do you have all the right agreements? Here’s information you need. Win the Independent Contractor Agreement