The difference is who pays for the other half of the social security taxes. An employee on a W4/W2 basis has income taxes , social security taxes and medicare taxes extracted and forwarded by the employer on each paycheck period. The employer has to pay a matching amount to the IRS. When an independent contractor is involved, the company sends a 1099 for the gross amount of wages paid to the contractor. That contractor is then responsible for paying income taxes, social security taxes, self employment taxes and medicare taxes. Companies like the contractor model because it saves them the administrative overhead of managing W4/W2 payroll and also lets them off the hook for their half of the social security tax burden. That's fine...unless the "contractor" is really a dedicated employee who works for no other business. That is labeled an attempt to evade the tax responsibilities on the part of the defacto employer.
Every law created by governments is an arbitrary law. You don't get to choose which ones to obey.
The difference is who pays for the other half of the social security taxes. An employee on a W4/W2 basis has income taxes , social security taxes and medicare taxes extracted and forwarded by the employer on each paycheck period. The employer has to pay a matching amount to the IRS. When an independent contractor is involved, the company sends a 1099 for the gross amount of wages paid to the contractor. That contractor is then responsible for paying income taxes, social security taxes, self employment taxes and medicare taxes. Companies like the contractor model because it saves them “
Either way, the IRS gets the total taxes because form SE has to be filled out for the person who is a contractor, and they pay double the 7.65 amount the EMOPLOYEE gets deducted. The problem arises when the contractor gets to deduct his expenses and pay on the NET amount only.
In effect, thie attitude by the IRS is stopping people from starting out by themselves, and growing into a larger company that can hire more people. They are stifling economic growth in the country with their heavy-handedness.
The real trick is that you must work for more than one person. You must provide all the materials to do the job, even your own calculator, pens and pencils.
The companies are getting out of more than just the matching Soc Sec and Medicare. They are escaping Federal and State Unemployment taxes. They are escaping benefits like health insurance, sick pay, vacation pay, etc.
If you truly have the ability to be self- employed, just make sure you are working for more than one person in a year. Consultants work for more than one company at a time, just in blocks of time.
Or- form your own legal company and have the pay go thru accounts Payable instead of the payroll ledgers.