How Independent Contractors Make More Money for Everyone
by Bill Rounds
How to Vanish
by Bill Rounds:
Foreign Drivers License Protects Families
is one of the biggest ways that we lose privacy. We must report
our income and where it comes from for tax purposes. Our banking
records are monitored and our identities vigorously identified.
and employers must reveal vast amounts of information to state
and federal labor regulators and tax collectors.
information is disclosed, even if it is to bureaucrats,
there is a huge risk of abuse, accidental
disclosure and fraud.
Plus, the employee-employer relationship has become
a cash cow for governments. Employees and employers
are low hanging fruit for taxes, fees and regulations
because they are easy
to monitor, record, control and collect from. Both
employers and employees must share a piece of their
economic pie with state and federal government officials,
increasing the costs to businesses and lowering the
benefit received by employees. Governments impose these
costs and regulations to take care of employees and
employers, whether they want to be taken care of or
is a way for both workers and businesses to free themselves
of many of these burdens, reduce costs, keep more money
their privacy. Becoming an independent contractor
instead of being an employee, or hiring independent
contractors instead of employees, does all of that and
reduces the amount of regulation that must be complied
with, reduces legal risks, and can reduce taxes for
both. This means there are more resources to share between
workers and firms.
though most of government regulation claims to protect
employees, it has had the opposite effect. The marketplace
changes much faster than government regulation. Government
regulation is designed for a business world that existed
50 years ago. There is no way that regulation by a slow
moving, democratic government that has to make weekend
deals just to keep from being shut down can keep pace
with a 21st century information age economy.
has been designed around a system where employees work at the same
company for most of their life. Today, the average worker will change
jobs many times in their lifetime. Minimum wage and overtime pay
was formulated when there was no competition from overseas labor.
Even the way that companies account for and fund their benefits
makes them extremely expensive for employees with diminishing
value. One of the worst parts of all is that employees have little
control over the taxes they pay.
Have Little Control Over Their Own Life
There is no
doubt that some of these protections benefited employees overall
at one time. Some may even be helpful today. But an employee has
no choice whether they want to participate in these systems, even
if they could get the same benefits elsewhere for less. Employees
have no control over their economic life.
over your own economic life is valuable, not only in
terms of mental health and a feeling of self worth and
independence, but also economically. Something as simple
as being able to control more of the taxes you pay can
have a dramatic impact on your financial well being.
A Worker Can Pay $0 In Federal Income Taxes
Street Journal recently did a case study showing
how an independent contractor can earn $150,000 in gross
earnings in a year, take a few very common tax deductions,
and have a federal income tax liability of $0.
it breaks down:
income as a self employed independent contractor.
$7,000 business start up expenses ($10,00 max first
year, $5,000 in subsequent years)
$10,000 legitimate business expenses
$9,500 Medicare and Social Security tax (half of $19,000
$43,100 401k contribution (you deduct both employee
and employer portion)
$10,000 IRA contribution ($5,00 for you, $5,000 for
$10,000 state and local taxes (estimated)
$10,000 mortgage interest
$10,000 health insurance premiums
$6,150 Health Savings account
$2,500 interest on student loan
$4,000 kid's college tuition
$1,500 tax credits (buy hybrid vehicle, install solar
$200 Lifetime Earning Credits (community college class)
tax liability of $0 on $150,000 income.
Contractors Pay Less Taxes Than Employees
entire strategy is premised on a very important issue.
To take advantage of these huge
tax benefits you cannot be a regular employee. You
can take advantage of every one of these tax
benefits as an independent contractor. A regular
employee would pay taxes on close to the full amount
of that $150,000 of income.
Pay Extremely High Labor Costs
cost their employers a lot more than their hourly wage.
Unemployment tax, ERISA, and Medicare costs alone are
15% of the total salary paid to employees. Employers
also pay an average of $7,500
per employee in health insurance every year, something
required when the firm has 50 or more employees.
Administrative Costs And Risks For Employers
top of these direct costs, there are numerous other
regulations that must be complied with, even if it does
not make economic sense. Employers are required to give
family leave under certain circumstances, have detailed
keeping requirements, and many other things that
raise the cost of having employees and decrease profitability,
without actually paying workers more.
are also exposed to lots of litigation risk. Whether
it is an employee discrimination suit, failing to comply
with regulation, harassment, overtime, even a conscientious
employer can find themselves in an expensive, often
frivolous, lawsuit. A lot of these costs and regulations
are preventing businesses from hiring employees.
Contractors Reduce Labor Costs And Increase Productivity
can still get the work done that they need to get done
without incurring these huge costs by hiring independent
contractors instead of employees. Independent contractors
are also easier to train, more productive and provide
a lot of flexibility in changing economic times.
economic benefits have attracted a lot of workers and
firms to try independent contractors instead of employees,
but beware. The IRS and the Department of Labor have
cracking down on those who do it wrong. Doing it
wrong could mean having to pay back taxes and interest
owed, or even paying penalties or overtime.
The IRS 20 Factor Test
is a way to do it right. The IRS has a 20-factor
test that they use to determine if the worker is
an employee or an independent contractor. This list
is very fact specific and the weight given to every
factor will depend on what other factors may reveal.
Contractor Should Control Their Own Work
of the most important things to consider is the amount
of control that the firm has over the worker. An independent
contractor will have control over their schedule and
how they perform the work. The firm will control what
they want the outcome or finished product to be. Suggestions
are permitted but they must be suggestions. This is
becoming much easier with the ability to work remotely
over the internet.
Contractor Can Do Work For Others At The Same Time
important factor is that the independent contractor
is free to do work for others as well. This can be a
critical factor that the IRS or Department of Labor
look at. It is much better if the independent contractor
is doing jobs for other clients, or at least advertising
in places like Craigslist for other clients.
Contracting Is A Win-Win
contractors allow workers and firms to share more money
between themselves. The government is entitled to much
less of the money that flows from firms to independent
contractors than employers and employees. Businesses
become more profitable, individuals keep more money
and everyone increases their privacy. Independent contractors
can also have more control over their tax
domicile, a more advanced but much more powerful
tax saving strategy.
is only scratching the surface of how to properly take
advantage of this powerful strategy. Secrets
of Independent Contractors, from HowToVanish.com
is a simple and complete guide to help businesses and
workers properly structure their relationship so they
can take advantage of the huge tax savings.
with permission from How to
Rounds, J.D. is a California attorney. He holds a degree in Accounting
from the University of Utah and a law degree from California
Western School of Law. He practices civil litigation, domestic
and foreign business entity formation and transactions, criminal
defense and privacy law. He is a strong advocate of personal and
financial freedom and civil liberties.
© 2011 How
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