Posted on: Wednesday, January 14, 2004

Why employers love independent contractors

By Mary Ellen Slayter
Washington Post

If employers could write fantasy novels, a key character would surely be the Perfect Worker. He would labor long hours without complaint, talk to his fellow droids only about the task at hand, squirt Go-Gurt into his mouth instead of breaking for lunch — and all his earnings would be reported on IRS Form 1099.

That way, there would be no Medicare and Social Security taxes to pay, no unemployment insurance premiums, no medical benefits, no 401(k) obligations.

Some employers have come wickedly close to fulfilling this dream with the "1099 employee."

The name derives from the 1099-MISC, the IRS form companies use to report money paid to independent contractors. But there is no such thing as a "1099 employee," no matter how badly some tightwad employers wish it were so. There are contractors. There are employees. Nothing in between.

Yet, an increasing number of people describe their work situations using this self-contradictory term. The Labor Department counts 8.5 million people as independent contractors.

Melissa Mauro of Warminster, Pa., said her last contracting job several years ago was "a little weird."

She picked up work for a publishing company that once paid her a salary, doing the exact work as a contractor that she had done as an employee, except now she was paid by the article and set her own hours. The work could be done only by someone trained by the company, she said. Not surprisingly, all the "contractors" were ex-employees. She was probably a legitimate contractor, if a grossly underpaid one.

Most benefits from incorrectly classifying someone as an independent contractor accrue to employers. They no longer worry about payroll taxes or workers' comp premiums or providing benefits such as health insurance. Many labor laws, such as those protecting workers from harassment and discrimination, no longer apply.

Workers can see some benefits, such as the ability to deduct the cost of a home office. But overall it's much riskier.

The reason the employers save money on payroll taxes is because they are offloaded to the worker. Employees split the burden for their Social Security taxes evenly with their employers; contractors are responsible for the whole load.

Contractors are also responsible for their health insurance and retirement savings.

So how can you tell if you are a legitimate contractor?

If your employer tells you where, when and how your work must be done, you're an employee. If you work continuously for an indefinite period at the same employer, you're an employee.

Contractors are hired for a specific task. Aside from a deadline, they generally have sweeping latitude over how the work gets done. Contractors can negotiate their fees. The IRS has a lot more information on its Web site, www.irs.gov; look for Publication 1779.