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Independent Contractors: A Few Thoughts and Observations

Posted on December 14, 2011 at 2:46 pm

Joining the ranks of independent contractors is great if you are one by choice. You get to choose your jobs and your hours and you can manage your time around the other areas of your life such as family. Many become independent not by choice, but through misclassification of employees by employers seeking to cut costs.

Pay to Play
You have to pay all of your own payroll taxes at a rate of 15.3 percent of net income plus your income tax. Be sure to keep good records so that you can write off your business expenses. If you pay a professional to fill in your forms, be prepared to pay more for the business part of your return.
You’ll also have to pay for all of the benefits that come for free (or close to free) as an employee. Ideally the cost for these “benefits” will be built into your fees. In reality, however, competition for the contract may lead you to drive your bid below what you would like to charge.

Why Be Independent?
So why are there so many independent contractors? I believe that a large number exist not by choice but by circumstance. My experiences as a tax preparer in 2010 led me to conclude that many employers are taking advantage of the competitive job market by hiring desperate workers as independent contractors rather than employees.

According to the IRS web site, the difference between employee and independent comes down to who has control over what you do. Typically, if the employer has control over what is done, when, and how it is done, then the worker is likely to be labeled an employee with all of the protections and benefits that apply.

Employers Pushing the Envelope
It’s exactly those protections and benefits that, in my opinion, lead so many employers to push the envelope when deciding how to define their workers. Imagine the cost savings to be had when one does not have to pay for insurance, vacation, or sick pay. What’s more, independent contractors can’t unionize and negotiate as a group. According to a report by the Department for Professional Employees AFL-CIO (DPE AFL-CIO), employers save as much as 30 % on their payroll costs by misclassifying employees.

Crackdown on Employers
All of this has not gone unnoticed by Federal and state agencies, however, and just today, Forbes posted an article describing how California passed SB459 which allows the California Labor and Workforce Development Agency to charge fines from $5,000 to $15,000 for each violation where employers are deemed to have deliberately misclassified workers.

The DPE AFL-CIO reported that in 2007, the General Accounting Office estimated that employee miscalculation resulted in lost tax revenues of as much as $4.7 billion in a single year. Employers found guilty of misclassification face stiff fines and penalties in addition to paying the back taxes that they owe. In a climate where both state and Fed are seeking revenues with fervor, I wouldn’t want to be one of those employers.