Sunday, January 27, 2002

Contractor status can be benefit

By Rhonda Abrams
Gannett News Service

        In coffee shops, bars, and offices around the country, voices are raised in hot dispute. They're trying to figure out who qualifies as an independent contractor (IC) and who has to be treated as an employee as far as the Internal Revenue Service is concerned.

        Thursday is the deadline for sending IRS Form W2 to employees and Form 1099 to those you've paid more than $600 in the last year for services, rent or attorney's fees. But whether you're self-employed or a business, independent contractor status is a daunting topic all year.

        Few areas of employment law are murkier. The IRS looks at “control issues” in three areas:

        • Behavioral — Does the worker control how they do the work?

        • Financial — Does the worker have a significant investment (e.g., own their own tools), can they make a profit or loss?

        • Relationship — Is the worker responsible for his benefits; is there a written contract?

        The federal government, states and cities all want to make certain that anyone who's really an employee gets treated that way. Why? Employees receive more labor-law protection and — most importantly — employers pay taxes on employees' wages, not on payments to ICs.

        Businesses often would like to treat employees as ICs for exactly those reasons. So the IRS is particularly aggressive in pursuing companies that have overused the IC designation.

        Advantages to being an IC:

        • More money up front. The client doesn't withhold taxes, Social Security, etc. from your check.

        • Tax deductions. More of your expenses — such as a computer, phone, travel, etc. — are deductible from your taxes.

        • Retirement savings. Some retirement programs allow you to shelter a larger percentage of your income.

        Disadvantages to being an IC:

        • Personal tax responsibility. You have to pay self-employment taxes, and you may have to pay estimated quarterly taxes.

        • No benefits. You don't receive benefits from your clients, such as health insurance.

        • Less security. Contractors are usually the first eliminated, without severance pay, when companies downsize.

        Advantages to employers for hiring ICs:

        • No payroll, Social Security, unemployment taxes.

        • No benefits.

        • More flexibility on ending relationship.

        Disadvantages to employers for hiring ICs:

        • Definite limits on your control (work hours, supervision, place of work, etc.) over workers.

        • BIG tax penalties if you classify an employee as an IC.

        Legitimate, self-employed contractors are usually highly motivated to do a good job. The opposite happens when a business really needs employees but treats them as ICs. Such workers are demoralized, less productive and eager to find better employment.

        You can find the IRS rules in IRS Publication 15-A, which you can download from its Web site at Be warned: it's a big file. And confusing.

        Contact Rhonda Abrams at


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