20 Ways Your Independent Contractor Might Actually Be An Employee | Hacker News Reader

20 Ways Your Independent Contractor Might Actually Be An Employee

bakerdonelson.com

32 pointsdctoedt21 comments

Wow, what a bureaucracy. In Finland the State has simple database (called "Ennakkoperintärekisteri"). If you register to that database as a contractor, you are held responsible for your own taxes/worker payments, and you can bill companies. Then companies can buy your services without worries. Really simple.

Nobody except the contractors wants this to be simple. The contractors would love it though, there would be less income lost to "preferred vendors" who provide the contractors with a stiff take on the paychecks, and they'd get to negotiate their own rates.

People wanting to hire contractors don't want this to be simple?

The implication being that a lot of company hire people as contractors when they are really employees and a database like this would instantly eliminate all the underhandedness.

It's a favorite pastime of labor lawyers to beat companies over the head with the Fair Labor Standards Act for classifying people as independent contractors when they are really acting like employees. I'm sure the IRS enjoys it too.

Well, its not simply about the US being unorganized but more about how it wants payroll tax.

True, but I wonder if the extra tax collected is cancelled out due to the overhead of the more complicated beaurocratic system? Maybe/Maybe not, but it still might not be worth it from a cost/value perspective.

Why does the government want to discourage a free-flowing labor market? Some thoughts:

1. It's easier to force GE to pay the correct payroll taxes for 100K employees than it is to police thousands of single-employee "companies" that file Schedule C's.

2. The government has co-opted corporations into providing pieces of the social safety net such as unemployment benefits, health insurance, etc. If a minimum wage employee was offered $1/hour more to be a contractor, he might take it. Then, if laid off, he might go on welfare instead of unemployment insurance paid for by the employer's contributions. Employment law enforces a bunch of social safety net stuff which can be circumvented by contractors.

3. Net taxes paid would decrease if everyone was a contractor. I have the right to pay myself a percentage of my earnings and take the rest as dividends which are not subject to payroll tax, etc. Also, I can deduct mileage from my home office and other things that reduce taxable earnings.

Can anyone think of other reasons?

Because individual contractors don't pay lobbyists like lawyers and union bosses. Point 1 is kinda wrong because the IRS has a better chance of "convincing" individual contractors to pay taxes correctly. Point 3 evens out and you tend to pay just as much.

"the IRS has a better chance of "convincing" individual contractors to pay taxes correctly"

Two things here:

1. Auditing GE's centralized payroll system is a lot easier than auditing 10K little businesses. Also, GE has so much to lose that it likely obeys the letter of the law.

2. GE doesn't pay its employees and then realize on April 15th that it doesn't have any money in the bank. Tons of small businesses end up owing money to the IRS because the owner (the painting contractor, etc.) didn't plan ahead.

Edit: Please note that I was referring specifically to payroll taxes in my original comment -- not international tax law, etc.

GE can lawyer up pretty fast, most individuals will do exactly what the IRS tells them since they can freeze your accounts and put liens on you without a court date. As I pointed out elsewhere, this isn't driven by logic or the IRS, it is driven by lobbying money.

There clearly are many grey areas in corporate taxation, especially when certain laws only apply to a few large companies. However, payroll taxes are not such a beast. The rules for how much must be paid as a percentage of W2 wages are pretty simple and easily audited. Furthermore, there's a built-in cheating detection system -- employees file individual income taxes and assert the tax payment details provided by their employers. So, it's easy for the IRS to figure out where fraud is happening. Dispatching an army of lawyers to argue against the obvious is of little value.

I get the feeling that this particular issue is probably being examined and this particular link has been provided based on the research someone did from when that guy flew his plane into the IRS building. (I forgot his name and do not feel like looking it up in the moment.) One of his major, even if it was strange, complaints was the inability for contractors to properly identify themselves as contractors when small changes to their working patterns can make them employees instead.

In my internship days, I had an employer who filed me as a contractor for tax purposes. It felt a bit sleazy, and I felt especially robbed when I later realized that I had to pay extra self-employment taxes. I really wish I had spoken up at the time.

There are cases of "independent contractor" abuse, and my case clearly violated almost every rule on this list.

This happened to me as well.

There's an almost identical set of rules in the UK: http://www.hmrc.gov.uk/ir35/

From my experience, I feel IR35 is actually set out to be beneficial for the worker and the organization, whereas it looks as if the US policy is set out to be beneficial for the IRS and US government.

Although in my circumstances it was quite easy for me to be IR35 compliant...so I may be biased.

IR35 always seemed very reasonable to me. The only thing annoying was that it could affect those who were being genuinely entrepreneurial because it had to be general enough to catch all the tax cheats.

Still, in the end it worked out OK. Annoyingly, it also worked out OK for many of the tax cheats, who just worded their contracts differently.

Does this apply to overseas workers hired by a company to perform accounting and back office communications task. If you pay for a full time employee in the Philippines or India do you have to worry about payroll taxes?

Not just with techies: http://www.washingtonpost.com/wp-dyn/content/article/2010/03...

Does a contractor need to meed all or any one of those 20 points?

How does this relate to contractors hired trough oDesk or Elance?

I see number of points they would meet, for example Payment by Hour, Right to Discharge, Oral or Written Reports etc.

What about a US company having a offshore office in some poor Asian country and having some of the employees as contractors. Is there any accountability for these companies? Can those employees do anything?

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