Determining the Status of an Independent Contractor and Taxes Essay

Determining the Status of an Independent Contractor and Taxes - Essay Example Avoiding taxes is not the primary goal of an independent contractor but they know if they are classified as employees they suffer some consequences. Some of the consequences one suffers are that they might not be hired by the hiring firm since they these firms will be forced to pay additional expenses of treating them as employees. The aims of the firms to maximise their profit and to ensure they achieve their goals, they have to ensure that they minimise their operational expenses. For this case, if an independent contractor is classified as an employee he will never be hired by the hiring firms. (Fishman, 2006) The other reason as to why the independent contractors do not need to be classified as employees is because they will add additional tax burden to themselves by being subjected to tax. Their pay will be deducted, something they would not be experiencing if they were independent contractor. (Fishman, 2006) According to Fishman (1997), the U.S Bureau of Labour Statistics shows that in U.S.A alone, there are eight million independent contractors and in the next ten years, this number is expected to double. The use of independent contractors is beneficial companies that cannot afford to hire permanent employees especially small and medium ones. This is especially so for those companies that can not be able to employ a permanent employee for specialized function. For instance, a company engaged in international commerce can hire an attorney who has specialized in international trade as an independent contractor to provide international legal advice. This staffing approach is more affordable than employee a permanent employee and for this case due to the fact that this attorney's salary will not be taxed, then it does not mean he want to avoid paying the tax. 1 Permanent employees have been given a great deal of job security by European laws and because of these laws, the economic uncertainty has forced employers to use short-term contracts than using permanent employment. These short-term contracts are the use of independent contract and statistics shows that this tread is on the increase. In every five employees in France, one is on part-time contract; 30 percent of workforce in Britain is on temporary employment; in Spain, for every ten jobs created, seven of them are on temporary basis; and the ban on private temporary employment agencies has been lifted in Germany. These statistics shows that there is great rise in the use of independent contractors in many European countries. The use of independent contractors has become popular since it reduces costs and legal requirements imposed on termination or lay off of employment in Europe. Due to the fact that the temporary employees hired by companies under temporary employment does not mea n that they are avoiding paying taxes since they employment is being dictated by circumstances. (Templeman, 1996) Independent contractors results in cost savings which include: reduced book keeping and payroll preparations costs, avoidance of taxes, reduced fringe benefits, elimination of worker's compensation benefits, elimination of overtime pay, decreased administrative burdens and reduction in capital and maintenance costs if the independent contractors provides their own tools and equipment. (Bureau of National Affairs, 1994; Stalnaker, 1993). Even though independent contr