On the OPEN Forum
When Did Hiring Independent Contractors Become “Illegal”?
Anita Campbell of Small Business Trends | May 19th, 2008 - 09:29 AM
(31) found this useful. Do you? 
Last month (April 2008) the U.S. Senate Committee on Small Business held hearings on the so-called underground economy. Its definition of “underground economy” is so broad, it may surprise you.
When I first heard about the hearings, I assumed the phrase “underground economy” related to the practice of hiring workers under the table and paying them in cash. After all, that’s the traditional definition of “underground economy.”
This paper from the Mises organization defines underground economy quite specifically: ‘There is a bustling and shadowy world where jobs, services, and business transactions are conducted by word of mouth and paid for in cash to avoid scrutiny by government officials. It is called the “underground economy,” which is as old as government itself. It springs from human nature that makes man choose between given alternatives. Facing the agents of government and their exactions, man will weigh the alternatives and may choose to go “underground.” ‘
So I was quite surprised to see that the Senate hearings seemed to have a different focus. The definition of “underground economy” in the Senate hearings seemed to target those who classify someone as an independent contractor, rather than an employee.
According to the statement by Senator John Kerry, Chair of the Senate Committee on Small Business, the definition of underground economy that the Committee is looking at includes small businesses that may misclassify independent contractors instead of employees. Senator Kerry’s statement notes: “Too many workers are being misclassified as independent contractors — an arrangement in which the employer is not responsible for withholding of income or paying employment taxes. Employers who erroneously misclassify their workers stand to save as much as 30 percent of their payroll costs. This puts law abiding employers at a disadvantage.”
I don’t know about you, but I’m troubled by this expansion of the definition of underground economy to include misclassification of independent contractors/employees.
Listen, I’m all for being a law abiding citizen. I wouldn’t dream of suggesting otherwise.
Paying workers under the table in cash, or accepting payment from customers in cash without reporting it is one thing. When you do not report income — either for your own company or for workers — and try to hide your tracks by purposely not keeping a records trail, that’s clearly wrong. It’s black — as in black-and-white wrong. That’s the underground economy. Anyone engaged in it knows it’s wrong.
However, hiring independent contractors can range from lily white to many shades of gray. In many cases it is perfectly legitimate. In fact, it may be the only way that very small businesses can grow. They can’t afford to hire employees, and typically start out with independent contractors.
In other cases, it’s a matter of interpretation. A small business may be reporting all income and all payments made to others, just have a worker misclassified. After all, the IRS requires companies to file 1099-Miscellaneous income statements for any contractor who receives more than $600 in a year. If you are filing 1099s, you are not trying to hide the payments.
You say the worker is in an independent contractor. The IRS says he or she is an employee. The test as to what constitutes an employee and what constitutes an independent contractor is not a clear one, but is open to some interpretation.
You may have misclassified someone. And you may have to pay penalties and make changes because of your error of misclassification.
But does that put you in the same league as an employer who uses illegal immigrants, pays them only in cash to avoid a records trail, and doesn’t report ANY payments at all for that person to the IRS? Should a business owner who legitimately believes someone is an independent contractor but misclassifies the person, be lumped in with those who are deliberately lying to the governmental tax authorities and going to pains to hide it?
I suggest these are two very different behaviors. Let’s not confuse them.
If workers are being paid under the table, in cash, with no records trail and no reporting of those payments to the IRS or to state tax officials, that’s against the law. Often it is undocumented immigrants who are being paid this way. They are being exploited. This is illegal, no question about it.
But I think it’s a different issue to start labeling hard-working business owners who are doing their best to interpret unclear rules as “cheaters.” If you do that, then you could drive businesses deep underground and off the books and into the REAL underground economy — businesses that otherwise would not want to be off the books. Or you’ll cause them to forgo growing and getting help for their businesses, and that won’t help the economy one bit.
What’s your view? Should small businesses using independent contractors and who report the payments they make to them, be lumped in with those who pay under the table and try to hide their payments? Is there a difference?
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Discussion Boards
Mr Carman | May 20th, 2008 at 9:22 pm
It is interesting what Clifton Lambreth author of Ford and the American Dream has to say about imigration in his new book. His chapter on the UAW is insightful and this article reminds me of Clifton lambreth’s comments.
Amanda | May 21st, 2008 at 9:11 am
I most definitely think there is a difference. I think I would only classify something as “underground” if it is something being hidden. I see no reason why they should lump responsible business owners who report income paid out with businesses who pay under the table with no reporting involved.
Ivana Taylor | May 22nd, 2008 at 4:26 pm
This sounds like another situation where politicians change the meanings of words and situations in order to influence someone’s agenda. It’s a shame that it doesn’t do small business any favors.
Chris | May 23rd, 2008 at 10:22 am
This is disappointing to say the least. Politics in action clearly. To lump small business owners into an “underground” category is just ridiculous if you ask me. What’s so underground about the small business world?
Anita Campbell | May 23rd, 2008 at 10:53 am
Like so many things today, Amanda and Ivana, our legislators are off working on things that don’t matter or that matter only to special interest groups, instead of focusing on what business owners really care about.
I would urge them to work on solving the healthcare problems and enacting legislation to make healthcare more affordable for small businesses to offer their employees, and more affordable for employees to contribute to.
That would help a much wider group of small businesses — and a much wider group of Americans.
Sally C. Cordle | May 23rd, 2008 at 2:24 pm
Sounds like none of you have ever been a missclassified employee. The employer can treat Independent Contractors as employees by conrolling them, threatening their jobs, but not give the IC the benifits that they deserve. No workers comp, no healthcare, no taxes paid. It’s the IC’s who get ripped off in the end as well as the government. This was the worst situation I’ve ever come across in the work force, and now my former employer claims she owns things I created when I never signed a “work for hire” agreement. I tried to be legal, it was the small business that was trying to save money by missclassifying me & all of my coworkers.
Anita Campbell | May 23rd, 2008 at 3:28 pm
Hi Sally,
I’m so sorry to hear that you had a difficult situation. It sounds like you may have recourse.
(1) See an attorney about your ownership rights in what you created. Without a work for hire agreement, the attorney is likely to tell you you’re in a good position and the employer is not. The employer cannot have it both ways. Seek legal advice on that issue.
(2) If you feel you were misclassified, report the employer to the IRS. They will make the employer pay up for witholding taxes, etc. There are provisions in the tax code to deal with employers who blatantly misclassify employees as contractors.
Good luck, Sally — didn’t mean to sound unfeeling for someone in your situation,
Anita
Anita Campbell | May 23rd, 2008 at 3:43 pm
Hi Sally,
One other thing I forgot to mention: you can report the employer to your state workers compensation bureau for failing to secure workers compensation, too. If you meet the test for an employee, the state will take action.
Best,
Anita
More Penalties for Misclassifying Employees as Independent Contractors? | Small Business Trends | May 25th, 2008 at 9:07 am
[…] When Did Hiring Independent Contractors Become “Illegal”? […]
Jan Dillaha | May 28th, 2008 at 9:52 am
The problem is that ICs are less likely to pay the taxes. The “tax gap” is uncollected tax and ICs tend to have issues paying their taxes. This is the ONLY reason Congress would cares. It is also the reason why they lump it all together. Non-compliant taxpayers are criminals. The benefits “due” these workers wouldn’t get 10 seconds of notice.
If small businesses didn’t feel so burdened by the rules governing employees (IRS/DOL/ERISA/State Wage and Hour/State Unemployment) they wouldn’t feel so compelled to use ICs. The folks in Congress have no clue what an average small business owner contends with.
Good ICs realize that they need to charge more than an employee in order to cover the cost of insurance, FICA, etc. If the IC understands that the business owner stands to save 30% by not putting them on payroll, why wouldn’t they ask for some of that to cover those costs? If they don’t ask for it, what does that say about their business sense?
Diane | June 2nd, 2008 at 3:44 pm
I absolutely agree with Senator Kerry. The field of homebased medical transcription is a prime example. There are “ICs” who only have the one account, and really, don’t get me started. I am happy to hear that something might be done about this.
» Blog Archive » Misclassification or Misunderstanding? | June 2nd, 2008 at 6:41 pm
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Point With a View | June 21st, 2008 at 9:34 am
Given enough time and enough polluted air, the thriving members of the human species will grow more nose hire. That’s adaptation.
Employers want to spend less to make more…, so they can thrive. Workers want to make more so they can spend how they choose…, thriving on their own terms. The government wants some of what both make, fair or not.
Perhaps the tax code needs to be addressed. Perhaps the American worker and the American “cottage industries” need to be remembered and “re-appreciated” as the fundamental building block of the American free enterprise system. Perhaps the real issue is that history has rather begun repeating itself…, just maybe…., “taxation without representation” was possibly better than “unfair taxation with abundant representation”. The American tax code is horrifically biased, and to be unaware of this is quite literally the expectation of policy makers.
Don’t quibble over the scraps, it’s no accident that we’re wrangling over matters such as who is and who is not a contractor. The 800 pound gorrilla in the room is the tax code itself and the inescapable reality that we Americans fund things with our hard earned wages that would make us ill were we to truely be aware. Change the code, change the use of the taxes we do pay, change the course of a nation. Argue over scraps and we’ll always argue over scraps.
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