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Originally Posted by Tawera
Our business sells consulting contracts to companies. If contracts go more than three months, we occasionally will use independent, third-party contractors to fill them. What are the advantages and disadvantages of putting those contractors on payroll versus a 1099?
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The relationship with an independent contractor differs from an employment relationship in that the independent contractor is minimally supervised by the company and generally is free to contract with others. The relationship has significant tax implications, so the IRS will challenge an independent contractor arrangement if the facts warrant it. One should not enter into such a contract without tax guidance.
Generally, the independent contractor is responsible for paying the full amount of Social Security tax, whereas the employee pays only half, with the employer paying the other half. The independent contractor also is responsible for timely income tax deposits, which otherwise are the employer's responsibility. In addition, the independent contractor pays for health care and retirement contributions as a self-employed individual.
Whether an independent contractor saves money is mostly a question of bargaining power. In a competitive labor market, the contractor should be able to recover tax, benefit and management costs in the contract.
The business risks of using contractors are loss of exclusivity and control. An employer is able to allocate an employee's time to meet the company's need at a locked-in cost. The company must compete for the independent contractor's time and attention at whatever the going rate. An employer also can maintain a higher degree of control over an employee's work to ensure efficiency and quality control.
I hope this answers your question.
02-18-2008, 08:51 AM
1099 versus W2 tax guidance question
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