Independent Contractor Compliance Blog - by Collabrus™

Consultants: Do you insist on being treated as an independent contractor even when confronted with evidence that suggests you look more like an employee?

This is a common occurrence in the field. In my role as Director of Compliance for Collabrus I’m an expert advisor to client companies that regularly utilize contingent workers to get vital work done. Here’s my perspective on why it happens so often…

You like working as an IC? You like the feeling of freedom? You like the variety? When someone suggests you should be classified as an employee do you dig in your heels and refuse? Have you really thought this strategy through?

Have you considered some of the benefits to being a payrolled employee? There are many, such as:

Withholding: I know withholding hurts your cash flow today, but it’s even worse if you fail to make quarterly deposits and owe the IRS too much at the end of the year. You are in deep trouble once you fall behind in this area. I’ve known IC’s who have been placed in serious financial traction by the IRS because they didn’t make the proper deposits.

Health Benefits: You’re young and healthy today, but look across the hallway where you’re plying your profession. See that 40+, or maybe 50+, person? That will be you someday.  Maybe you’re waiting for the government to give you free health care? Under the government plans I’ve seen, IC’s will likely be paying a premium price for coverage, while employees may still be receiving funded benefits from their employers.

Retirement Plans 401k: Many employers provide matching contributions for employees.  Matching contributions can really leverage your retirement and bring it closer and make it more comfortable. I’m speaking from experience when I say you can’t start building a 401 (k) nest egg too soon in your career. You should plan way ahead on this one.

Loyalty: Companies tend to support their employees, but often see contract labor as a temporary asset. Generally, IC’s and temporary help are the first to be cut during tough economic times.

Stability: Getting tired of putting your skills on the market every few months? Employees don’t advertise and seek out new clients on a regular basis. They just focus on work. If you’re an IC that doesn’t do that because you’ve been with this client for a long time you probably aren’t a true IC-which means you and your “client” are taking a risk.

Regular Paycheck: Employees are guaranteed a regular paycheck and there are government agencies that oversee this process to insure an employee is promptly and fully paid (including overtime). Independent contractors are on their own. In theory, they can work and not make a profit-actually lose money! Also, if for any reason, an IC doesn’t get paid he must sue the client in court at their own expense.

The IRS likes to audit IC’s: It is a fact that the IRS scrutinizes 1099 and Schedule C Filers much closely than their W 2 counterparts at the same income level. Why is this? Because the IRS estimates 58% of the 1099 Schedule C Filers underreport their income and take erroneous business expense deductions. The IRS identifies this group as a significant contributor to the Tax Gap, which is continues to be a priority issue for the federal government.

Why do independent contractors resist being classified as employees?

Employee misclassification puts both the IC and the company at great risk.

Whenever I inform a client company that a contractor or project does not qualify for IC status and the contractor starts pushing back, insisting on being treated as an IC, I wonder if they have truly thought this issue through. The net pay will probably be very close to the same for the contractor, and there will be many more benefits not available as an IC. In all cases the contractor is not really an IC or I would never have recommended classifying him as an employee.