The Independent Contractor Problem Continues and Grows
Tom aka Rusty Rustbelt
The Independent Contractor Problem Continues and Grows
HT: Associated Press
The IRS and many state governments are stepping up enforcement of the use of “independent contractors” who are actually employees.
While there are plenty of legitimate business-to-business independent contractor arrangements, other businesses sidestep the law by misclassifying employees as ICs. (lay person readable information at the IRS site, http://www.irs.gov/businesses/small/article/0,,id=99921,00.html).
Example: Sam the General Contractor needs plumbers to work on new homes. He finds three plumbers, but treats them as “contractors” rather than as employees, although they meet the statutory definition of employees. Sam issues Form 1099 at the end of the year, in an attempt to look legit.
Taxation agencies know there is a lower percentage of income reporting from the ICs, and for those who do report the income there are usually expense deductions not normally useful to a real employee.
Taxation agencies receive less revenue, there are no state and federal unemployment taxes paid, and the ICs are not covered by workers compensation insurance.
This tactic is not limited to small businesses, ten of thousands of engineers and computer programmers have found themselves in similar arrangements (some by choice, some not). Also, millions of undocumented workers fall into this somewhere, with very little reporting by either employer or employee (or reporting with stolen or fictional identities).
Businesses using this dodge derive a huge advantage over legit employers. However, for those needing work, be a phony IC is a lot better than sitting at home. Raising costs is a bad idea right now, but legit employers already have those costs.
This is a game of whack-a-mole with millions of moles, and even I have some empathy for the tax agencies trying to get this under control. But then Sam might decide to get by with only 2 plumbers.
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Tom aka Rusty Rustbelt
I think the last thing we need to be doing is cracking down on companies use of independent contractors since it reduces the flexability in rearranging the economy to one not in recession.
Most of us are employees at will. At anytime unless it’s your own company your boss can walk up to you and terminate your employee. As a long time contractor my job security was always in having marketable skills and an updated resume. Now i’m full time and honestly I don’t see that much difference.
If you sqeezed an extra $20,000 (!) in taxes out of every one of the “tens of thousands” of independent engineers and computer programmers, pretty soon you’d be getting into one investment banker bonus territory.
I think it needs to be looked at. I’ve been helping out at a Jackson Hewitt office on the weekends, which is opening up a whole new world to me this tax season. One single mother that crossed our path worked as a cashier at a quickie-mart for ~half a year and came in with a 1099 for ~$5500 which was her only income. Her tax liability was about $400. Not only did she have no idea about the situation she was being put in – she had no means to pay the tax bill. There are rules to be followed for a reason. If they are not worth inforcing – why do we have them?
I’m a liscensed contractor. When I sub out to another liscensed contractor I am payed the wages that contractor would normally pay an employee plus an additional 40%, which is less then the costs the other contractor would be burdoned with if he were to pay the full cost of having an employee. Why do you begrude me this?
*** One single mother that crossed our path worked as a cashier at a quickie-mart for ~half a year and came in with a 1099 for ~$5500 which was her only income. Her tax liability was about $400.***
That doesn’t seem to make sense. Income tax on $5500 in income after a $5700 Standard Deduction, at least $7300 in exemptions, and probably an Earned Income Tax Credit is zero wether the gal is a part time employee or an independent contractor.
If she was a part time employee, then the employer held back about $400 and threw in $400 themselves to cover Social Security. If she was carried (illegally I should think) as an independent contractor, then the self employment tax would have been around $800, no?
Judy,
She was supposed to pay the taxes for the quater that she earned the money. Maybe they should teach a course in practical economics to higher schooler so they would learn how to function properly in the work world.
The US has produced the largest drop in employment relative to the drop in output during the latest recession of any OECD economy – evidence of greater labor market flexibility than other OECD economies. To argue that maintaining labor market flexibility outweighs other considerations when the US already lies at the extreme in flexibiltiiy among developed economies is a bit of a stretch.
At the same time, what one former contractor who is now full-time notices about his own situation, apparently on the single dimension of self-evaluated “marketable skills” have limited relevance here. The points made in the initial post had to do with firms side-stepping federal and state law to gain an advantage over more law-abiding firms.
I’m aware that a good bit of the business-first element winks at illegal activity as long as it is in service of making money, but then so counterfeiters, drug lords and killers-for-hire.
***Now i’m full time and honestly I don’t see that much difference*** Cantab
But your employer does because they are now liable for half your Social Security plus unemployment insurance plus workman’s comp.
Who said anybody was begrudging legitimate contractors their pay? It is quite dishonest to conflate an argument about illegitimate “contractor” designations under tax law with legitimate use of contractors. If you aren’t afraid of honest discussion, why try to confuse legitimate with illegitimate use of contractors? If you are afraid of honest discussion, why should we listen to you?
My bad
This is partly in response to the burdens of regulation put on by government. You got your FICA, your UI, your workman’s comp, your Family Medical Leave, your EEOC, your plant closing laws, your 401K. All these add to the cost of permanent employees.
If you want to see the effect of all these, try being a 1099 for a while. It is amazing how much more take home pay you get. I can work half as many hours for the same takehome pay. It will however be a painful April 15, but 1099 guys get to write off a lot of expenses. So it is win-win.
But as Cantab said in his first post, the primary attraction of 1099’ers is FLEXIBILITY. In the reduced demand economy, a lot of companies have a need for less that full time employees (2 days a week, or project-to-project). 1099 employees can string together a couple such companies and have the equivalent of a full time job or better.
One thing that would much reduce the problem, but which our right wingers would never agree to is to set up a government organization that allows independent contractors one stop access to various manadatory and optional insurance programs — FICA, unemployment, workmans comp, health insurance, etc at competetive rates with minimal paperwork. Of course that’s evil since single payer health insurance is in there and providing that for anyone under the age of 65 is creeping Communism or something.
For that matter, having done the paperwork for my wife’s small business for a number of years, I think many small businesses would love to have a one stop place where they could fill out one check a month and one form and have all that handled. What I found aggravating wasn’t the money that went to all those things — which wasn’t that great anyway. It was the hundred or so forms I had to fill out every year reporting pretty much the same information over and over to the IRS, SSA, the State Income Tax People, Federal Unemployment, State Unemployment, State Sales Tax people, etc, etc, etc.
VtCodger,
I would have taken all that stuff it were free to me. I would have declined to pay for it though.
VT:
Hmmm, I am betting Social Security Payroll Withholding and maybe Judy isn’t giving us all of the info or has forgotten some of it.
A lot of the “independent contractors” are nothing of the sort — not like plumbers or electricians or IT guys.
Nope, they’re cleaners, delivery people, nannies, phone agents, and lots of other jobs where they are designated “independent contractors” for the sole purpose of scraping the last vestiges of responsibility from the glossy spats of the business owners. No sick leave or vacation, no minimum wage, no ride home after midnight from a bad neighbourhood, nothing whatsoever. As the NYT reports today, ” There are whole industries where the business model is based on violative practices.”
Cantab jumps in with his own experience when it has nothing to do with these people. I assume he’s in a sought-after profession, and can call the tune. Guys like that have bargaining power, if only their feet. The office cleaners of the world do not — that’s what laws are for.
In 2009, the number of credits available to somebody with a small amount of earned income is ridiculous. Not in total amount, in complexity.
EIC, child, child care, MWPC, etc – most directed to the people least able to figure them.
Laws and Unions.
At least they were before the other guys went to total class warfare 30 years ago.
Noni,
I don’t want to organize our economy all for the benefit of people from the village in foreign countries that are not even well educated in their own language. I would offer them opportunity but no guarantees for them coming to America. Its up to them to try to squeeze in some night school and work on their English language skills so they can get better jobs with the benefits you’re talking about.
All cleaners, nannies, delivery people are Mexican or S. American? Wow.
Cantab, did you even read my comment? I don’t recall saying anything about undocumented workers. I am talking American citizens of all ages and races, who end up being in jobs where a dishonest designation of “independent contractor” is slapped on them in order to cut already paltry pay and benefits below levels set by law. You remember federal law? it’s this thing we used to have.
The independent contractor v. employee issue is really more of a rules of the road issue than one of unfair economic advantage to the hiring business.
If the independent contractor is paying self-employment taxes as required by law, there isn’t tax loss relative to employees from FICA taxation. If the hiring party is using either a 1099 or a W-2, there isn’t unreported income that is being missed. If the independent contractor complies with applicable laws (e.g. regarding worker’s compensation and OSHA), there aren’t big holes. Lot of independent contractor relationships (probably the vast majority) aren’t coming close to having minimum wage issues or paying less than minimum wage plus time and a half for hours over forty (or whatever rate would be needed to make the overtime work out) under the FLSA.
Expenses paid by independent contractors and deducted could have been reimbursed with the same tax effect. Unemployment insurance not bought means unemployment claims not made. The biggest issue is the gap in the 1099 regime for independent contactors organized a C corporations.
But, relatively few economic regulations provide meaningful benefits to having an industry organized with independent contractor v. having an industry organized with employees (one big example where the change has taken place in a legitimate economically substantial way is household services which used to be provided by employees of a household and are now provided by companies that serve multiple households as independent contractors). Some industries even use the hybrid form of “employee leasing.”
The gain from cracking down in short term. It comes mostly from calling 100% an ICs compenation wages and imposing employer side payroll taxes on that, rather than imputing a wage amount by backing out employer side payroll tax obligations the way that you do when you are self-employed and fill out your 1040.
It is bad for an employer to get caught, and good in the short term for government coffers, but this is really a case of tax collectors benefiting from ambiguity of their own creation about the rules of the road, not a genuine business advantage. The main motivation for a lot of small businesses is far simpler than true tax evasion; they simply don’t want to do the involved bookkeeping that goes into a true employment relationship and has to be outsourced because the owner isn’t competent to do the work personally.
Rdan,
I don’t know where all cleaners, nannies, and other workers are from. I doubt that all nannies are Mexican or S. American, but I suspect most cleaners are. The grounds keepers at the Mt. Auburn cemetary seem to be mostly from Latin America. There are probably still carpenters from Ireland. The crew that does yard work at my parents condo are from Latin America.