I just wrote a blog post about this question – Will changing employees into independent contractors save on payroll taxes? And also debunking some ideas about payroll. This was one of the topics I discuss. Read the entire blog post, but here’s my answer to that question.
- The savings in using independent contractor are mostly illusionary. If you are not paying the Social Security and Medicare taxes, independent contractors have to pay them.
- Independent contractors also have to handle their benefits on what you pay them. If you think you are saving money, you are in reality cheating the contractor.
- You should be paying them all of the costs that you are making them pay for. There is no free lunch.
You are also forgoing the upside of hiring employees.
- You don’t get to decide whether a worker is an employee or an independent contractor.
- There are 20 common law rules for determining whether a worker is an independent contractor or not. See them here.
- A preponderance of those 20 rules determines the outcome. The common law rules are the law.
In the end, if there is a dispute, the court will decide.
Learn more about W2s versus 1099s here.