The truth about the independent contractor scam
Amazon is the latest in a long line of employers being sued by people the company has allegedly brought on as independent contractors rather than hiring them as employees. Four drivers who work for the Prime Now delivery service of Amazon in the Southern California area have sued Amazon and Scoobeez, a courier company Amazon contracts with. According to the story in the Los Angeles Times, the four wore uniforms with the Amazon logo, were required to allow themselves to be tracked by Amazon tracking devices and made deliveries as instructed by dispatchers who were controlling their work to ensure deliveries were made on schedule. This lawsuit and others regarding people who are being compensated as independent contractors versus as employees turn on a simple question. What's the difference between the two?
In August of this year, the Internal Revenue Service published an article on their website, IRS website. The title of the piece is "Independent Contractor (Self-Employed) or Employee?" aid if you're really curious, you can read it for yourself. Independent Contractor (Self-Employed) or Employee? But I've extracted the most important part of the article, the definition of an independent contractor according to the IRS.
"People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax."
In the past, the IRS used a 20 factor test to determine if someone was an employee or an independent contractor, and you can see that test (it's lengthy) at 20 Factor Test. Under both the definition above and more clearly under the old test, the delivery drivers being used by Amazon for the Prime Now service in Orange County, CA appear to be employees.
So why are Amazon, Uber, Lyft, UPS and other employers, large and small, improperly classifying people as ICs rather than employees? Because it saves money. As an employer, these businesses would have to pay the employer's portion of Social Security and Medicare taxes. They'd have to pay the unemployment taxes at the federal and state level. They'd have to purchase workers compensation insurance. Instead they engage in the fiction that these people are ICs and not employers, pay them an amount in excess of the minimum wage to partially offset these costs and the savings they realize pump up the business' bottom line.
This is another factor in the ever-growing inequality of income and wealth in the U. S. and it needs to be stopped. Anyone who has ever been victimized by this scam has a fairly easy remedy available to them. It is known as the Form SS-8.
The SS-8 is available on the IRS website (Form SS-8) and if you are no longer working for the employer who scammed you, filling it out is risk-free. You had to file an income tax return claiming this income from "self-employment" as such and pay both employee and employer portions of employment taxes on the net income. You may have taken some deductions against the income on a Schedule C, which would potentially be lost to you if you are reclassified as an employee, but you'll recover the employer portion of self-employment taxes you paid.
Your former (or current if you're a brave soul) will pay a lot more. They will have to pay the employer portion of those taxes they should have paid, and will pay a stiff penalty as well. That penalty can include all of the following:
$50 for each W-2 that was not issued to the employee instead of the 1099-MISC that was issued.
1.5% of all wages paid.
40% of the employee portion of FICA and Medicare taxes that should have been withheld from the employee.
100% of the employer portion of FICA and Medicare taxes that the employer should have paid.
A failure to pay taxes penalty of 0.5% per month for each month these amounts were not paid, up to a total of 25% of the entire liability from the above three items.
That can be quite stiff. Conversely, employers who realize they have improperly classified employees as ICs can pay only a very small portion of these amounts, provided they voluntarily reclassify and comply.
It could get even worse. If the IRS determines fraud or intentional misconduct took place they can up the penalties to as much as 20% of all wages paid plus 100% of both the employer and employee portions of FICA and Medicare taxes. Criminal penalties of $1,000 per employee and one year in prison could also be added.
A study done by the federal government back in 2011 estimated that more than three million U. S. workers are improperly classified as independent contractors. Last year a drywall contractor in Arizona paid $600,000 in back wages and penalties for improperly classifying 445 employees as ICs.
Not a risk I'd want to take if I were running a business.
In August of this year, the Internal Revenue Service published an article on their website, IRS website. The title of the piece is "Independent Contractor (Self-Employed) or Employee?" aid if you're really curious, you can read it for yourself. Independent Contractor (Self-Employed) or Employee? But I've extracted the most important part of the article, the definition of an independent contractor according to the IRS.
"People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax."
In the past, the IRS used a 20 factor test to determine if someone was an employee or an independent contractor, and you can see that test (it's lengthy) at 20 Factor Test. Under both the definition above and more clearly under the old test, the delivery drivers being used by Amazon for the Prime Now service in Orange County, CA appear to be employees.
So why are Amazon, Uber, Lyft, UPS and other employers, large and small, improperly classifying people as ICs rather than employees? Because it saves money. As an employer, these businesses would have to pay the employer's portion of Social Security and Medicare taxes. They'd have to pay the unemployment taxes at the federal and state level. They'd have to purchase workers compensation insurance. Instead they engage in the fiction that these people are ICs and not employers, pay them an amount in excess of the minimum wage to partially offset these costs and the savings they realize pump up the business' bottom line.
This is another factor in the ever-growing inequality of income and wealth in the U. S. and it needs to be stopped. Anyone who has ever been victimized by this scam has a fairly easy remedy available to them. It is known as the Form SS-8.
The SS-8 is available on the IRS website (Form SS-8) and if you are no longer working for the employer who scammed you, filling it out is risk-free. You had to file an income tax return claiming this income from "self-employment" as such and pay both employee and employer portions of employment taxes on the net income. You may have taken some deductions against the income on a Schedule C, which would potentially be lost to you if you are reclassified as an employee, but you'll recover the employer portion of self-employment taxes you paid.
Your former (or current if you're a brave soul) will pay a lot more. They will have to pay the employer portion of those taxes they should have paid, and will pay a stiff penalty as well. That penalty can include all of the following:
$50 for each W-2 that was not issued to the employee instead of the 1099-MISC that was issued.
1.5% of all wages paid.
40% of the employee portion of FICA and Medicare taxes that should have been withheld from the employee.
100% of the employer portion of FICA and Medicare taxes that the employer should have paid.
A failure to pay taxes penalty of 0.5% per month for each month these amounts were not paid, up to a total of 25% of the entire liability from the above three items.
That can be quite stiff. Conversely, employers who realize they have improperly classified employees as ICs can pay only a very small portion of these amounts, provided they voluntarily reclassify and comply.
It could get even worse. If the IRS determines fraud or intentional misconduct took place they can up the penalties to as much as 20% of all wages paid plus 100% of both the employer and employee portions of FICA and Medicare taxes. Criminal penalties of $1,000 per employee and one year in prison could also be added.
A study done by the federal government back in 2011 estimated that more than three million U. S. workers are improperly classified as independent contractors. Last year a drywall contractor in Arizona paid $600,000 in back wages and penalties for improperly classifying 445 employees as ICs.
Not a risk I'd want to take if I were running a business.
posted by me at 1:22 PM
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