Independent Contractors Beware: Your Employer May Be Taking Advantage of You

With jobs scarce and money tight these days, the prospect of working as an "Independent contractor," and getting a full paycheck with no big bites taken out for taxes and other obligatory expenses might seem like the perfect setup, and it could well be. But it could also mean that your boss is taking advantage of you and the government.

Here's how it works

You agree with a company or person to complete a certain project by a certain deadline, and you agree on the amount you'll be paid to do it. The employer pays you upon completion or in increments, whatever you've decided. Sounds simple enough, whether it involves cleaning an office, constructing a building or writing a magazine article. If you're paying someone regularly to mow your lawn, clean your house or walk your dog, they are probably not your employees, they are independent contractors, and you pay them the fee you've agreed upon when they invoice you.

But there are more and more employers these days who take advantage of this situation. If they list you as an independent contractor rather than as an employee, they avoid paying Social Security, unemployment insurance, Medicare, and other costs like workers' compensation insurance for the employee, and bookkeeper fees to keep track of it all. It's estimated that employers average paying about $9 extra per hour for actual employees. When they pay you as an independent contractor, they avoid all that.

Which is best?

That might be just fine with you if you you're good at figuring out and paying your own taxes, and if you don't care about health, unemployment and disability insurance or paid vacation. Many people would rather handle those things on their own. But you may not realize that if you're working under certain circumstances, your boss is legally required to pay the government all those extras, and could be severely fined for avoiding them.

For example, one prominent businesswoman who owned a phone sales company made it a policy to pay her entire staff as independent contractors. Her personal assistant, her business manager, her receptionist and her sales team were required to report to the office every day for specific hours, work on her phones using her computers, and dress by certain standards. At the end of each week, she would write them all fat, deduction-free checks. Bonuses came in the form of lunches and dinners out with the boss, designer handbags and spa certificates.

It worked just fine for most until someone got sick -- and discovered that not only did they lack health insurance, they weren't guaranteed sick leave, and were easily and effortlessly replaced. They had no unemployment benefits when they were laid off when business was slow, and when April rolled around, they were handed a 1099 disclosing all of their earnings, and they were stunned by their tax burdens, both to the IRS and to the state. They could also be fired at their employer's whim, with no recourse from the EEOC, and no one to complain to when she became abusive.

How to know the difference

How do you know if you are actually an employee or an independent contractor? If you can answer yes to several of the following questions, you are probably not working as an independent contractor but as an employee, and you should be paid accordingly:

  • Does your employer control every aspect of your job, leaving you absolutely no independence or leeway in how it's completed?

  • Does your employer tell you when and where to work, specifying certain hours and location, owned or leased by the employer?

  • Does your employer specify what you should wear and how you should look?

  • Does your employer have a say in whom you hire to assist you?

  • Does your employer tell you exactly where to get the materials needed to do the job?

  • Is extensive, paid training involved?

  • Does your employer require exclusivity? Are you prohibited from doing work for others and advertising your services?

  • Are you being paid an hourly, weekly or monthly wage? Are you being paid a commission? Independent contractors are usually paid a flat fee, although in some professions, such as legal services, independent contractors can be paid hourly wages.
  • Were you hired with the expectation that the relationship will continue indefinitely, rather than for a specific project or period?

  • Are your services a key aspect of the business? For example, a receptionist must perform specific duties during certain hours, according to business policies, and does not have much freedom to decide how and when the job will be done.

If you still aren't sure if you're an independent contractor or an employee, try downloading Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF). Either the worker or the employer can fill out and send in the form, and the IRS will review the situation and tell you its determination on the matter.

It's probably best to fill this form out as an employee and let the IRS do any dirty work that needs to be done, however. If you suspect your boss is trying to pull one over on the government, he or she is probably not the type of employer that would say, "Why thank you for bringing these violations to my attention!" But then again, if you suspect your boss is sincerely unaware and willing and eager to comply, by all means, discuss it with him or her.

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