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Employee vs. Independant Contractor Part 2: Common Misconceptions

Updated: Oct 15, 2019


L.A. Financial Management is currently writing a series of articles on independent contractors and employees. Our second article focuses on the business owner’s perspective in hiring an independent contractor. Here are some common misconceptions we hear frequently from small business owners:

  1. “Well, I decide if I hire her/him as an independent contractor.”

  2. “If I hire her/him as an independent contractor, I’ll actually be saving her/him money on their taxes.”

  3. “I’ll hire him/her as an independent contractor for now, and then I can determine if I like her/him. If so, I’ll transition her/him to an employee.”

  4. “If I hire her/him as an independent contractor, I won’t have to pay payroll taxes.”

  5. “Independent contractors are cheaper than employees. And I can pay them more because I don’t have to pay taxes."

To start to debunk some of these, please read our first article of this series written for the independent contractor/freelancer.

“Well, I decide if I hire her/him as an independent contractor.”

The first thing we want to mention is that it’s not up to the business owner to determine if the person is hired as an independent contractor or employee; it’s based on the relationship and responsibilities of business and person for hire. But we’ll get into this topic in more depth throughout our series, so let’s first talk about the other points… (if I’ve intrigued you, you can find some California guidance here.)

“If I hire her/him as an independent contractor, I’ll actually be saving her/him money on their taxes.”

Some people think that independent contractors are saving money on their taxes because “they have more write-offs.” Well that may be true, but write-offs are commensurate with actual expenses. So these “write-offs” are actually eating into the income they are receiving. For example, an independent contractor will usually use a laptop purchased and maintained on their own whereas an employee is provided a company laptop to do his/her work.

“I’ll hire him/her as an independent contractor for now, and then I can determine if I like her/him. If so, I’ll transition her/him to an employee.”

As we mentioned in #1, it’s not up to you, it’s based on the relationship and responsibilities of the person being hired. So if this person is an employee, they should start as an employee. The definition of independent contractor does not include provisional employee or employee on probation.

“If I hire her/him as an independent contractor, I won’t have to pay payroll taxes.”

Now this one sounds a little scary and that’s because it is. So here’s an example of something we’ve seen before: an employer hires person as an independent contractor. The independent contractor is providing services that would normally be performed by an employee. The independent contractor is terminated for poor performance. The independent contractor is unaware that he/she is a contractor, assumes employment based on work with previous employers. The independent contractor files for unemployment benefits with the state, the state informs the individual that the employee never reported wages for this person and therefore he/she is not able to receive unemployment benefits. The state further researches the relationship between the independent contractor and the employer. The state contacts the employer, performs an audit, determines that the contractor should have paid wages as an employee, and now the employer is liable for both the employee and employers portion of the applicable taxes. And this is just the State issue, there’s a new set of problems at the Federal level.

“Independent contractors are cheaper than employees. And I can pay them more because I don’t have to pay taxes.”

As we mentioned in #2, independent contractors are incurring costs of their own. We encourage independent contractors to be mindful of these costs when determining their pricing. Here are just a few things that many independent contractors need to consider: equipment, software-as-a-service, home-business costs, professional insurance, health insurance, sick time, legal fees (e.g. contract review), incorporation fees, minimum state taxes, business/city tax, and admin time to track and maintain these responsibilities. Then add to it, they are responsible for their own taxes at a presumed rate of 25%. All in, it’s hard to make a case that this is a cheaper option.

As we’ve mentioned before, each situation is different and you should always consult a professional when determining or changing a classification.

If you have further questions regarding this topic, feel free to reach out to us!


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© 2017 by Lara C. Azoy, CPA. 

DISCLAIMER: The views and opinions expressed here and at www.la-financialmanagement.com are those of the authors and do not necessarily reflect the official policy or position of L.A. Financial Management. Any content provided by our authors are of their opinion, and are not intended to malign any religion, ethic group, club, organization, company, individual or anyone or anything.

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