Why Classifying You as an Independent Contractor Means Savings for Your Employer
There are a number of reasons why companies choose to hire workers as independent contractors rather than employees — but many times, the classification they choose will not hold up.
Companies save significantly when they hire independent contractors, and independent contractors often underestimate how much money they lose by working as an independent contractor rather than an employee.
Companies save when they hire employees as independent contractors by not having to pay:
- Their half of your Social Security and Medicare taxes. Independent contractors pay 100%. Employees pay only 50%, and the employer contributes the other 50%.
- Unemployment insurance. Independent contractors are ineligible for employer-paid unemployment benefits.
- Workers’ compensation insurance. Independent contractors are not eligible for workers’ compensation.
- Minimum wage, overtime, sick pay, and mandatory breaks.
- Healthcare coverage. Independent contractors are ineligible for healthcare coverage as an employee under the Affordable Care Act starting in 2014.
When businesses do not have to pay their half of payroll taxes, such as Social Security pension contribution and Medicare tax, the savings are significant. According to the Internal Revenue Service, these payroll taxes accounted for 15.3 percent of gross wages in 2013 and 2014.
Some industries, like trucking and construction, have more savings than others when it comes to other benefits such as disability insurance and workers’ compensation. This creates somewhat of an incentive in those industries to lean toward hiring independent contractors rather than employees.
Workers’ compensation insurance premiums vary between companies and industries, costing more for companies and industries that tend to have more claims and more serious injuries. Industries that tend to pay higher premiums also have greater incentives for avoiding workers’ compensation entirely. For example, workers’ compensation premiums for a dangerous occupation like roofing could cost more than 50% of the payroll.
Hiring workers as independent contractors also creates savings for employers by avoiding complying with the Fair Labor Standards Act and state requirements for minimum wage and overtime. It also allows businesses to hire undocumented workers without being liable for verifying immigration status or incurring penalties for employing undocumented workers.