Posted on 10/27/2014 12:50:09 PM PDT by fulltlt
So if your company has you go from being an employee to a contract worker is that the same as being terminated? Can you then collect unemployment if you decide not to work as a contract worker? I know that it has implications for health insurance. What are some of the other pros or cons to this situation? What are things to be aware of and look out for?
The IRS (the honest side of the IRS) might have something to say about such an action. One cannot just declare employees to be independent contractors. There are a number of criteria that are looked at to determine whether one is a legitimate IC or a sham to avoid taxes and regulation.
You are responsible for the full 12 1/2% social security tax.
You also have to pay estimated quarterly income tax estimates.
You have to get your own health care.
You are not eligible for unemployment insurance without jumping through a bunch of hoops (if then).
You need to buy your own errors and omissions insurance.
Not sure what workman’s comp does, probably not covered unless you buy a policy.
You are responsible for all the money on your pay checks as to taxes. Any expenses, you have to document.
Yes, you just got laid off. The good news is you can make some money as a contractor. BTW, the IRS takes a dim view of what your employer is trying to do.
I had an employer do this, then they declared bankruptcy before paying my contractor invoice.
THAT SUCKED.
I think I’ve heard that this would be illegal here (Oregon). Seems we have to terminate (layoff) someone and cannot hire them as contractors for six months? (i’m foggy on the details)
And if your “employer” tells you what to do, how to do it and when to do it, the IRS says he is not hiring a contractor, but an employee.
Short answer is yes, because you got fired, regardless of what they want to label your post-employment status as. If you choose to become an ‘independent contractor’, that’s unrelated to your being terminated. Downside is being in charge of your own tax witholdings, insurance etc.
Several companies have tried this then failed to meet the qualifications of hiring independent contractors versus employees.
You should become aware of the differences and keep records when you believe the company is treating you like an employee and then owes you benefits.
Are you talking a true contract worker or have you been changed from full time employee to some kind of limited term employee? My employer does quite a few LTEs but usually they are hired in and become FTEs eventually. Can’t say I’ve heard of a case going the other way but I imagine that is possible.
Contract labor. All they can do is tell you what they want
done, give you a deadline for completion and negotiate a
price with you. They can’t make you punch a clock, show
up at a certain time and when to leave. You are responsible
for your own insurance, which may include general liability,
paying your own taxes including self employment tax (15.3%).
The good thing is you get your money first.
If you were regularly employed and they put you on this you
were terminated. It may be just a chicken sh.. way to get
around paying unemployment. Once your contract labor and
they fork you out, that’s it, you get zip, nothing. Not
even severance or anything you would get if you were
normally employed.
It hasn’t actually happened yet. I was asked to do something that would violate the law and I said no I would not do it. Then I was told it might be better if I didn’t work here as an employee so they would change me to a contract worker.
I don’t know why they would want to do that. I’m still not going to do what they are asking if it’s illegal.
wow, sounds like time to explore other opportunities.
I think you nailed it.
I am sorry to hear that you are in this situation.
If they change you to a contracted employee, it will depend on the state as to whether you qualify for unemployment. Possibly you will be able to collect, but have to report the income in any weeks that you receive payments based on your contracted work.
As a contracted employee, you should ask for a written contract, so you both know the terms. It is likely they will shift you to a situation wherein you have to “bill” them for your pay.
Your income will be reported on 1099s, not W2s, and you will be responsible for paying social security taxes and the employer share, as a self-employed person. You may also have to file quarterly federal income tax estimates/payments.
You may be able to get “free” health insurance, if it seems you will have no income or very low income.
If your employer wants to change ONLY your status, but you would still have all the other criteria such as responsibilities, performance standards, etc., then they are pushing another illegal act. As a contracted worker, you could theoretically do the same work for several firms. If the employer will continue to provide you with a work space, computer, phone, etc., and has the say over how you spend your “work time”, then you would technically still be an employee.
Employers cannot arbitrarily make that determination-- it's codified into law.
If you feel that you are an employee who is being forced into an independent contractor status incorrectly, you can report this to either the IRS or to the State that you work in. States want employees classified correctly-- because employers are obligated to pay into state unemployment insurance. In the state that I live in, independent contractors have the option of participating in state unemployment insurance, but only if they pay in.
Independent contractors aren't eligible for employer provided group insurance. However, an employee who has been misclassified as a contractor can sue an employer for failure to offer coverage through existing group health insurance plans.
There are additional issues related to workers comp that can also get employers in trouble if they are not in compliance with IRS rules. FYI-- this is a hot button issue with the IRS -- hopefully your employer knows this and has made a good faith attempt to comply with the rules.
There has to be a formal break in the employer / employee relationship which means you should consider yourself terminated.
Just make sure that the company follows all of their written employee policies and the like for pay outs, seniority call back, union Laudermill hearings, etc. Even exempt, non union employees may be entitled to termination hearings, if nothing more than to get on record why the company is taking this type of action If they don’t then you may have them by the short and curlys.
Do not sign any after the fact employee contract for severance package that says you give up your rights to sue. Some employers may try this as well. My last employer tried to alter my employment contract (management agreement)after they “laid me off” by adding the agreement not to sue for wrongful termination. I came back with my an additional $$ cost to them if they wanted to add that clause.
You should check with your State Labor and Industries department to see if what they are doing is legal, or contact a lawyer. Also beware that this may violate the Equal Employment laws if you are have protected status, based upon race, religion, sex, age, disability, etc.
If they lay you off as an employee and offer to hire you back as a contractor, you are eligible for unemployment.
If they say you are fired for cause but then say you can come back as a contractor - you may want to get an attorney, especially if it is still “you have to come in 8-5, M-F, do the same work, but pay your own taxes”.
A brave new world is what you may face. There is something the DOL and IRS cling to called the 20 question test for employee vs. contractor. Most times the result of the test is that people are employees and not contractors. That is what the feds prefer because if everybody had to write checks for quarterly taxes and pay both sides of FUTA, SUTA, Medicare and Medicade and SS there would be a justified rebellion. The feds would also be chasing “their” money from a bunch of broke people who already spent it because they don’t know how to manage withholdng.
If your present employer has already asked you to do something you think is illegal, you declined and they still want you around as a contractor... well, they won’t mind skirting the law again. You probably won’t get hurt by that, they will but we are at that point in society where show me the man I’ll show you the crime “he has committed”. Easy for me to say but I’d find another place to work. Like a woman who finds a guy who is cheating on his wife... she is getting no bargain. If he’ll cheat on the first one he’ll probably cheat on the second one too.
Here are the pointers though, some have been suggested already, if you have to be a contractor until you can do something else.
1. You need Workmen’s Comp. If you are injured on business you will not be covered by your personal health insurance
2. You need to make provision for double your employee status payroll taxes
3. You’ll need to make quarterly tax payments for your estimated income tax and payroll tax
4. If you issue yourself a W-2 you’ll need to make quarterly payroll reports even if you don’t pay yourself anything and you’ll need to keep doing that without interruption until you somehow unhitch yourself from the feds in that respect.
5. You’ll need some kind of professional and liability insurance unless you can stipulate that the company indemnify you very specifically
6. You’ll need a formal contract stipulating the scope of work, whom you are accountable to, payment terms, invoicing, dispute resolution, termination clauses, penalties for termination, governing law and location for litigation, etc. NOLO.com is a good place for guidance
7. You need to build in vacation and sick leave into your rate. Taking it is your business
8. Car hire needs to be agreed
9. You are to deliver a scope of work in some agreed time span either on a best efforts hourly or daily basis or on a turnkey basis. More risk = higher price. Where you do it is up to you. They can’t stipulate the time frame or location you work.
10. IT needs to be taken care of somehow. You make money by using a computer not by working on a computer. You also need to make provision for someone to pay for equipment and office supplies
11. There are some benefits. A lot of what you pay for now will become legitimate expense items.
12. Decide how much personal risk you want to take. If you have many personal assets you will probably want to incorporate and put that little speed bump in front of your personal assets. if you do that it needs to be done before you sign the contract because with a corporation you cease to exist where the contract is concerned. You work for the corporation the corporation works for the client company.
13. Legal status is different from tax status. Most small businesses are S-Corps and pay taxes on any profits at your marginal tax rate.
14. You can’t get umemployment but you will have to pay for it
15. You probably can’t get either short or long term disability so don’t get sick and don’t get hurt.
You are on your own. Nobody loves you or cares about you. With every new client you are going to have to prove yourself from scratch. You are a hired gun mercenary and will be treated just the same. You are going to have to produce every day or you don’t eat.
Etc.
Good luck. You have just been given a whole hell of a lot more than anyone ever was able to tell me in any clear way when I started. Same for most people. I never found a single book or guide that did anything but wander about and confuse me. It left me convinced that few people that know how to correctly be self-employed have ever written about it.
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