More on independent contractors and dumb regulations

Posted on | February 16, 2010 | Comments Off

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(Photo by Mat Honan, via Flickr)

In a comment on yesterday’s podcast, Leah Drake wrote:

Thanks for your article. I think where it hit home for us this year is how many more 1099’s we were hit with than before on our two LLC’s from the medium to bigger corps. Like suddenly everyone else has become the income police on small businesses. I don’t see anyone asking for W-9’s from the big boys or sending them 1099’s. Is this just competitive fear at work, the price of small business success or something else?

You know, most of the time, I respond to comments by leaving another comment but I thought this one deserved its own post.

Generally speaking, if you are blindfolded and facing a firing squad, at the very least somebody owes it to you to tell you what you’ve done to deserve what you are about to get. Even mass murderers and serial killers must be charged with their crimes, given an opportunity to defend themselves before a jury of their peers.

So, yeah, there are actually a couple of different things going on here.

The first and third of those proposed regulations — the one where businesses hiring independent contractors are required to inform those freelancers, in writing, of the differences between that and employees (including the worker benefits/protections they don’t get) and the other one that permits the IRS to come behind you and re-classify your independent contractor out from under you — are reactive.

In certain industry sectors (particularly, I am told, in construction), arranging for workplace safety can be an expensive proposition. So, some companies get out of that by hiring their workers as contractors. Often these workers are poorly educated, often they are immigrants, often they are desperate for work and don’t know anything about it (like their obligation to pay their own income taxes), etc.

So, this is the Labor Department’s attempt to stop those unscrupulous companies from taking advantage of that particular labor pool.

The other piece — and, for anybody who doesn’t have a free email subscription to the Microbusiness News Briefs (wink, wink), that’s the proposal that businesses that pay an independent contractor $600 or more per year can be required by that contractor to withhold federal income taxes for their gross earnings at a flat rate of their choosing — is undoubtedly an effort on the part of the feds to make a dent in the tax gap.

For the uninitiated, the tax gap is the difference between the amount of money the IRS collects in taxes and the amount they believe they should collect in taxes.

Some years ago, National Taxpayer Advocate Nina Olsen named the tax gap as the top taxpayer problem for that year and fingered nonemployer Schedule C filers as the majority of the culprits.

And it’s true. Self-employed Schedule C filers without employees are 57% of the taxpayers responsible for the tax gap. This happens because they (a) under-report income, (b) over-report expenses and/or deductions, or (c) fail to file.

Here’s the thing, though: while those Schedule C filers are most of the taxpayers responsible for the tax gap, they only account for 23% of the money involved.

Most of the remaining 77% of the money is owed by high net worth individuals and companies that can afford pricey lawyers who can show them how to hide their money in countries with uncooperative governments that don’t inform the IRS about it at all.

So, you may ask yourself, why is the government wanting to bother little nonemployer businesses (i.e., moderate income individuals who don’t really bother anybody) for not even a quarter of the money owing?

Because, in this particular circumstance, we’re the low-hanging fruit, of course!

As a group, we also tend to not be quite as politically well-connected nor inclined (or even able) to offer large campaign contributions as those high net worth individuals and companies.

And there you have it. Your tax dollars at work to make your life difficult because somebody else owes the government further tax dollars they want to put to work.

In justice to them, this only goes to show that there really are reasons for the things they do, even when those things seem terribly unfair. You’re right, you don’t see them picking on giant corporations — many of whom use their pricey lawyers and accountants to figure out how to arrange matters so that (perfectly legally!) they can end up paying less taxes than you do.

It is also, I am sorry to say, another episode of the disastrous way in which Democrats excell at making enemies out of small businesses. I won’t say they are openly hostile to them (even though it often looks like it), since they always protest, wounded, that they are not.

I’m willing to give them the benefit of the doubt. Maybe they really don’t hate us.

But, if they dont, they sure are good at faking it.


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