How Independent Contractors Make More Money for Everyone by Bill Rounds

Employees Suffer

Even 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.

Healthcare 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 and pensions 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.

Employees 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.

Control 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.

How A Worker Can Pay $0 In Federal Income Taxes

The Wall 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.

Here's how it breaks down:

$150,000 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 paid)

$43,100 401k contribution (you deduct both employee and employer portion)

$10,000 IRA contribution ($5,00 for you, $5,000 for a spouse)

$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 panels, etc.)

$200 Lifetime Earning Credits (community college class)

= tax liability of $0 on $150,000 income.

Independent Contractors Pay Less Taxes Than Employees

This 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.

Employers Pay Extremely High Labor Costs

Employees 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.

High Administrative Costs And Risks For Employers

On 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 record keeping requirements, and many other things that raise the cost of having employees and decrease profitability, without actually paying workers more.

Employers 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.

Independent Contractors Reduce Labor Costs And Increase Productivity

Businesses 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.

IRS Scrutiny

These 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 begun 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.

Follow The IRS 20 Factor Test

There 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.

Independent Contractor Should Control Their Own Work

One 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.

Independent Contractor Can Do Work For Others At The Same Time

Another 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.

Independent Contracting Is A Win-Win

Independent 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.

Conclusion

This 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.

Reprinted with permission from How to Vanish.

December 27, 2011

Bill 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.