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,,,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.

Tom aka Rusty Rustbelt

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