Independent Contractor? 4 Ways Being Classified As One Hurts You.

True self-employment can be wonderful and have many benefits.  However, too often, companies will try to call members of its workforce “independent contractors” in an effort to save on payroll taxes and other expenses when they shouldn’t.  Sometimes workers see the bigger paycheck (because taxes are not being withheld) and the opportunity to deduct “business expenses” on their taxes at the end of the year, and may think it’s better for them.  But, in the long run, companies are actually taking advantage of people and doing this in such a way that it hurts you.  The following are some of the most common ways self-employment can actually be a bad thing:

Missing Overtime

If you are working more than 40 hours a week, and really you should be paid as an employee rather than as an independent contractor, you might be entitled to overtime pay.  This is true even if you are not paid on an hourly basis or even if you don’t even keep track of your time at all.  The law has ways to figure out what your “hourly rate” is assumed to be so that we can calculate what time and a half that amount is for overtime purposes.

You Still Have to Pay Taxes

The tax aspect of independent contractor affects you most directly in two ways.  First, when you are an “employee,” the employer pays half of your social security contribution, and you pay the other half.  When you are an independent contractor, you have to pay BOTH parts.  That can add up fast!

Second, the taxes you have to pay can be big amounts you might not be expecting.  When you are an independent contractor, you should receive a 1099 at the end of the year rather than a W2 form, showing your income.  So, if you earn $50,000 after deductions as an independent contractor and your tax bracket was 20%, you would owe around $10,000 in taxes.  If you are not making your estimated payments along the way you can incur additional penalties.  These can take people who have not been in business for themselves by surprise and can be devastating.

No Unemployment Insurance

If you have been working for a company as an “independent contractor” for a while and they suddenly decide they no longer need your services, you are going to have trouble getting unemployment compensation through the Department of Labor.  Keep in mind, just because the company called you an independent contractor doesn’t mean you were – you can still apply.  If the Department of Labor thinks you should have been classified as an “employee” you might still be eligible for unemployment.

Limited Options for Workers Compensation

True independent contractors are generally not covered by workers compensation insurance; only employees are.  Especially if your job is one in which you stand a decent chance of getting hurt on the job, this is something you might want to keep in mind.

If your employer has classified you as an independent contractor, make sure you really look close to see if this is in your best interest.  If you think you should be considered an employee, we may be able to help.  Contact us for a confidential meeting with one of our attorneys.