Question

Many small businesses have to squeeze down costs any way they can just to survive. One way many businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20 factor test” that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find themselves subject to “self-employment” taxes, by which they bear the brunt of both the employee’s and the employer’s shares of FICA taxes.

Requirements

1. When a business abuses this issue, how is the independent contractor hurt?
2. If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an ethical issue involved? Who is hurt?

Answer 1

Solution 1. The independent contractor get hurt when companies abuse this law because the contractor has to ay his/her own EICA) and also other associated taxes that the employer may have been responsible for thus financially burdening the worker. The worker also has to pay all taxes at every instance, instead of having taxes taking throughout the year, which puts more responsibility on the worker than he would have had to bear hatthe company followed the law more closely. 2. There is an ethical issue involved when the company interprets the law in avery stanted way because the employee has to bear more costs and responsibility then he otherwise would have to. The company is saving money at the expense of the worker. This is unethical and in some cases illegal.