Archinect
anchor

The Myth of the ‘Contract Worker’

Feb 20 '13 25 Last Comment
Nick LaddNick Ladd
Feb 20, 13 5:38 pm

Long post, but very pertinent.

Contract working has been on my mind a lot recently.  I have recently relocated and have been offered several jobs with the caveat that I would be a ‘contract worker’. What the hell does that mean? It is extremely common right now, and I am convinced most of those offering these positions (and those taking them) don’t really understand what this means.


Disclaimer: I’m not an accountant or lawyer. I am not qualified to give legal advice, so please don’t take my word for it. This is my interpretation as I understand it from various government resources online. Seek professional counsel if you have questions.


Your company can call you whatever they want, but all that matters is what the IRS thinks.


‘Independent Contractor’ and ‘Employee’ are legal definitions set forth by the IRS. There is a web site that gives all sorts of information on whether you are one or the other.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-%28Self-Employed%29-or-Employee%3F


The key parts of these definitions taken directly from the IRS website:


Independent Contractor:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Defined


“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”


“You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”


Employee:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employee-%28Common-Law-Employee%29


“Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”


Specifically, there are a series of ‘tests’ that are used as guidance in determining your status. The biggest issue is the degree of control you have over the means and timing to complete your work. Do you report directly and frequently to a superior? Do they tell you how and when to do things? Do you have a permanent desk? Are you under the direct supervision of someone? Are you using their equipment, software, etc.? Guess what? According to the IRS you ARE NOT an independent contractor, you are an employee. Guess what else? You employer is committing tax evasion by circumventing payroll taxes, not withholding tax from your paycheck, not to mention the other types of things that are in place to protect employees. Being temporary, part-time, on a trial period, etc. does not mean that you are not an employee!


What does this mean for an intern architect?
I’m sure most intern architects are looking to complete IDP. Guess what, the definition of ‘independent contractor’ means that you are not under anyone’s direct supervision. NCARB requires the direct supervision of an architect for all of your units. This is specifically why some states (NY for example) will not accept experience gained as an independent contractor to count for IDP. Here is the exact text from New York State’s licensing web site:


“Experience obtained in any work setting as a consultant or contract worker is generally not given any credit towards the experience requirement for licensure in New York State. If you have experience as a consultant or contract worker, please have your supervisor submit a letter to the State Board for Architecture outlining your role and responsibilities on projects and how the experience gained was lawful in nature.”


http://www.op.nysed.gov/prof/arch/archlic.htm

What about paying taxes?
So you want to be an ‘independent contractor’? Guess what, by virtue of this, you are also now a genuine business. Congrats! This mean you’ll need to file your taxes as (at the very least) a sole-proprietor, fill out a Schedule C to report your profits, and begin paying quarterly taxes (better start saving). Guess what else? Now that you’re an ‘independent contractor’ you’re responsible for the social security your ‘employer’ would have been paying on your behalf, so get ready for a big hit when you discover you have to start paying something called ‘self-employment taxes’. You might also want to talk to your city and state officials as well, because you’ll probably need to register with the Secretary of State, and get a city business license so they can tax you as well and take another small piece of the pie.


What about liability protection?
I am not qualified to speak on this, but I’d guess that your work as an ‘independent contractor’ is not covered under the firm’s O&E or Liability insurance. Hope you don’t make a mistake!


The Bottom Line
I see why firms are doing this. Times are/have been tough and firms are hesitant to bring in real, full-time employees. What they don’t realize is that it is their actions and the reality of the situation that matters. You can call an employee whatever you want, but if the IRS thinks they’re an employee, they’re an employee. You may not be purposefully trying to commit tax evasion, hurt your employee’s chances to complete IDP, or open yourself up to liability, but you are.

 

Xenakis
Feb 20, 13 5:52 pm

I am 1099 - IRS and Franchise tax board - I wish I can be a direct someday - the tax burden is severe. 

Miles JaffeMiles Jaffe
Feb 20, 13 6:52 pm

What it means is that you get no benefits and no commitment from your "client". It also means you are on the hook for your own taxes including quarterly payments, and are in a grey area in terms of liability. Are you licensed?

You may also be required (by your "client") to have workman's comp policy, as your contract employer may be charged 15% of payments paid to you if you don't. If they've got any employees on the books, they are audited by comp twice a year.

vado retro
Feb 20, 13 7:16 pm

c401-2007

there is no there
Feb 20, 13 8:33 pm

Being "self-employed" even as a contract worker also means you can't get a mortgage loan either, at least not right away. Be prepared to be able to show tax returns for at least two years if you want to buy a house or even refinance. I found this out the hard way too.

petclark
Feb 20, 13 9:29 pm

These comments are all true, but if you plan on ever running a business, you had better get used to the tax man knocking at your door and the insurance company perusing your books.  Also plan on having a hard time getting a mortgage and affording the basic health insurance benefits.  

My frustration as I posted in the contract worker forum is why doesn't New York count the time spent as a contract worker?  What if you don't establish a contract with the architect you are working for and just work for them on an as needed basis?  That's how I have been doing it and when I was working for him I was in the office and I was under his direct supervision.  When I had a question I would walk up to his office and ask him.  I even had him write the letter to the state describing the work and they still said the work didn't qualify.

My next thought was to ask him to put me on the books, but he has come on tough times (like many in the profession) and doesn't gross enough to afford the payroll taxes necessary to pay me as an employee.  I guess you just have to be patient and figure a way through the maze that is the licensing process.

quizzical
Feb 20, 13 9:36 pm

petclark - presumably, in your self-employed capacity, you're also subject to the same payroll taxes as the guy you're working for in a "contract" capacity. Unless I'm missing something here, why don't you sit down with him, go through the arithmetic, and work out an hourly rate to you as an employee that is equal to what you would be left with yourself on an 'after payroll taxes' basis as a contract employee -- for you this arrangement should be a "wash" and would allow your time to count for NY State.

Nick LaddNick Ladd
Feb 20, 13 9:43 pm

@petclark - The problem is that you and your boss are classifying you as an independent contractor when the IRS' legal definitions (what really matters) would classify you as an employee. By the very definition, an independent contractor isn't under the direct supervision of anyone, hence the word 'independent'. IDP requires direct supervision, so it follows that independent contract hours do not count towards IDP. It makes perfect logical sense. The real issue is that the work you are doing is being misclassified, screwing you out of IDP hours and potentially putting your employer up to big tax penalties and back payments should he/she get caught. The economy is tough, and it seems like lots of folks are deliberately misclassifying employees as a means to cheat on their taxes.

Gregory WalkerGregory Walker
Feb 20, 13 10:12 pm

nick - i don't agree that it's a tax cheat. what we have in our current labor laws is a huge, gaping hole that doesn't allow for 'temporary' employment, without the long term hangover of a huge hit to your unemployment contributions the following year. you're either an employee or not, whether that's for 2 weeks or for 20 years. personally, there's a huge difference between the two. 

 

so, just to summarize my position: if we had a labor law that allowed us to hire someone for up to 3 months, without accruing any additional unemployment penalties if/when they leave the firm, this would be a great thing. (i don't mind the s.s. taxes, setting up withholding, etc. of course, if we'd just go single payer like the rest of the civilized world, it would take insurance out of the equation as well). 

 

overall, the laws are not keeping up with the current realities of the working world. so, yes, people are going to hire out contractors for short term positions when they don't have another palatable option. i'd be happy to re-state the math again sometime, but can't at the moment.

Gregory WalkerGregory Walker
Feb 20, 13 10:13 pm

oh, and idp is a totally different animal - there's so much that's screwed up with that system...

there is no there
Feb 20, 13 10:19 pm

Greg, why can't you hire with a built-in expiration? If you can terminate an employee for any reason, which I thought you could except for discrimination issues, can't that reason be that you only needed help for a few months?

Nick LaddNick Ladd
Feb 20, 13 10:59 pm

@Gregory - I agree 100% that the laws are screwy and need reform. I still think however that many, many employers are calling legitimate employees independent contractors for financial reasons and convenience when, by the word of the law they are employees per the IRS' definitions and should be classified as such. The law is screwy, we don't like it, but it is still being broken by these companies. Firms are stuck between a rock and a hard place when making hiring decisions. I'd personally like the AIA or other lobbying groups to take up this issue. I feel like it's one of the industry's dirty little secrets that no one is really enforcing. Unfortunately, it hurts a lot of interns who are desperate for work and getting hit harder on the tax side then they should. At the very least, I hope employees working as independent contractors are asking for a premium to account for this.

Gregory WalkerGregory Walker
Feb 20, 13 11:39 pm

nick - it's not just our industry. it's a lot of service (mostly) industries. 

and, yes, i think it's incumbent on both sides to very clearly understand what the implications are. when we've had to hire someone for a specific project (as contract), we've clearly spelled out the term it was expected to last and reviewed what the tax implications would be so that they understood it (some had, some had not). and it doesn't just hit interns - it's really harder for anyone who's been a true employee all their life. 

 

tint - you can, but from the perspective that, once someone's an employee, they're entitled to unemployment benefits if they've been terminated... that's the backside hit firms don't want to incur for a 2-3 month hire. your profit off their time might be, say, 5k over that 3 months. if you incur 16k in unemployment (because they then went on to collect for the next 12 months), well... that's not fair to the employer any more than the employee. so, a limited benefits, temporary position would be ideal in some situations.

 

look, i think the better firms, in general, are going to lock down talent that they know they can't do without. maybe some firms can get away with that, but not very many. if someone's really good, it's in the employer's best interest to make the 'honest', just to keep them around. i just don't see that as being incompatible with the need for reforms in the other end.

curtkram
Feb 21, 13 8:12 am

gregory, i suspect you do try to be up front about hiring a contract employee, but to offer a bit of perspective that might be because, in your case, you're not a horrible person.  a fair number of people who own architect companies are horrible people.  or they just don't know how business works and can't communicate the implications of contract employment because they don't understand it.

also, from the employee's perspective, that person has to pay for food and shelter.  that's not an option.  so after their term ends, they have no more income and have to somehow survive.  that's where unemployment comes in.  the system now says you have to help cover the cost.  that's probably because govt (the people we chose write legislation) thinks you might be part of the reason they're unemployed.  if that money didn't come from you as a business owner, it would come from all of us in the form of higher taxes.  or the person would just die of malnourishment or something, which is not an option.

the rules were written to protect people who want to work hard but can't find the opportunity to do so, from the horrible employers who maybe could keep them hired during lean times but instead put themselves ahead of humanity and compassion.  there are always going to be cases, with pretty much any legislation, where you can say this rule doesn't fit this situation.  if you hire someone for 3 months and they'll be fine after that, that's probably one of the situations where you're stuck under the legislation even though it's not the situation the legislation was created to address.

jla-x
Feb 21, 13 10:39 am

Being "self-employed" even as a contract worker also means you can't get a mortgage loan either, at least not right away. Be prepared to be able to show tax returns for at least two years if you want to buy a house or even refinance. I found this out the hard way too.

I found this out the hard way too.  One way around this is to open an llc, put your money into the llc account, and then pay yourself a salary from it. 

toasteroven
Feb 21, 13 10:52 am

question to you firm owners - do you bill out direct cost of your IC workers, or do you bill out with your multiplier and pocket the difference?

toasteroven
Feb 21, 13 11:29 am

@greg - that's not how unemployment insurance works in most states - they typically only charge your account for the amount of time the person worked for you - not a full 12 months.  plus don't you calculate contributions into your overhead?

Xenakis
Feb 21, 13 11:49 am

Nick Ladd

Sure I agree - I have been a 1099 since 2010 - I would like to exchange my 4.5 years of Revit experience for a direct hire position - I have to go back down to Tax Ninja again - there goes $350.00 - the upshot for any of us on contract is that we all need to step up our game to be noticed to make it worth while for someone to extend those offers of real jobs - The job I have, I "bought"  with a 1099 agreement - 

toasteroven
Feb 21, 13 2:50 pm

@xenakis:  these guys are getting a pretty sweet deal out of you - why would anyone want to extend a full-time position to someone like you?

 

let's pretend a typical full-time entry-level employee is billed out at 3x their base rate, and the firm has a profit goal of 10% ( intern makes $20/hr, they "cost" the firm $54/hr and are billed out at $60/hr, firm makes $6/hr off their work in profit).  If your direct cost to them as a IC is, say, $30/hr and they still bill you out at $60, they make $30/hr in profit off you.  why wouldn't you want to only hire cheap, clueless interns as ICs and make more profit?

Xenakis
Feb 21, 13 2:58 pm

the IRS wants me to do something about it - change jobs or change careers - they are losing patience

labocce
Feb 21, 13 5:29 pm

I have worked a number of contract positions in the last few years. It is not ideal, but you do not have to get totally screwed over.

First, unemployment looks at your highest two quarters from the last 4 quarters. You are not eligible for unemployment benefits unless you have worked for 6 months. So employers can hire you of for less than six months without risking an unemployment claim. If they need you for more than that, they should hire you or at least pay unemployment.

As for taxes, there simple solution. Figure our what your salary should be as an employee. And what it would be after taxes. Then find the hourly rate that would be the same minus independent contractor tax rates. Add 10% since, hey, you are managing yourself. Ask your employer for that amount. So $20/hour + 30% tax = $27, call it $30 / hour. If the employer is truly worried about employment claims, then this solves the issue. They pay what they would have paid in taxes to your for taxes. They save on unemployment insurance premiums since you are not on the roster. I have done this several times. It's not ideal but at least you can pay your bills.

Jean Nouvel
Feb 23, 13 11:01 am

There is a reason people incorporate.

Gregory WalkerGregory Walker
Feb 23, 13 1:29 pm

@ toaster - it probably depends on the state. in georgia, if you had employment in the last 2 quarters, you're eligible. so, they break down each 3 months, starting from jan. so, if you someone only for jan/feb, then they don't make it. dec. 31 to feb 27, yes they do.

however: my rate is determined by the number of people fired, our overall revenue, etc. so, if i hire/fire 6 people over 12 months, vs. hiring one full time and keeping them on, my rate will be through the roof (proportionally) the next year. 

yes, your monthly amount is partly tied to your wages, but the length is not. at least not here. 

we don't bill hourly on very many projects - it's usually a fixed fee that we're working within. honestly, we don't do the calculations like you are - we figure in the IC rates the same way we would FT staff (and we do a little bump in their rate to make up for the SS tax on their end). but our overall margins/etc. are about the same regardless. and, what your formula doesn't account for is the time lost if an IC doesn't do the work correctly or we want to do more studies, or anything else that isn't billable to the client. in a vacuum, where every hour is billable, the scenario you've described is perfect, regardless of the employment status of the worker on the staff.

distant
Feb 23, 13 4:06 pm

At our firm, we do use independent contractors from time to time -- however, they are truly that -- independent contractors. They've set themselves up to operate as their own independent business; they submit monthly (or bi-weekly) invoices for their work; and they typically work on a simple 1-2 page contract that defines our relationship on a specific project. We don't provide any employee benefits, but their contract rate is calculated to include a factor to cover the value of such benefits.

We do typically provide them access to our office and our computer network, but we don't get too rigid about their comings and goings or whether they do 100% of their work in the office -- it's really all about contribution and performance. As a general rule, they understand - and accept - when they need to be here and when it's okay not to be.  For the most part, these are people we have known for some years - in some cases they're former employees of our firm and there's a high level of mutual trust.

Usually, these are individuals who prefer to work with us in this manner. For whatever reason, they want to be self-employed (with all the risks that entails) and don't have a permanent relationship with any one firm, although they might have regular working relationships with two or three firms such as ours.

At the end of their stint with us, they just go away until we need them again (if they're available). There's never any question of them applying for unemployment and we don't incur negative impact on our unemployment rates when they depart.

These relationships are mutually beneficial - both professionally and economically - and totally fair to both parties. However, I know of some firms around here who treat individuals as "independent contractors" when their relationship to the firm is - in all respects - that of an "employee". I find that repugnant -- and, totally unnecessary.

Nick LaddNick Ladd
Feb 24, 13 10:16 am

@distant - Your understanding of the term seems to be right on. I have no problem with it when both parties completely understand the nature of the relationship and are not stretching the definitions of an independent contractor. Unfortunately, there are a ton of businesses doing this without really understanding the implications of it.

I'd be curious to see how you deal with the issues of professional liability when working with an independent contractor? I'd also be curious to see if any individual states have ruled that someone without a license acting as an independent contractor with an architecture firm is illegally practicing architecture since in some ways, many are offering architectural services without a license.

distant
Feb 24, 13 3:30 pm

Nick - most, if not all, issues related to professional liability can be handled via appropriate indemnification language in the agreement -- our lawyers know how to do this. We are the architect of record and we expect to be responsible for professional liability issues.

As for your other question, while I suppose anything is possible, I've never heard of a case where an independent contractor has been cited for 'practicing architecture'. The way I look at this issue, since our firm holds the contract with the client and we will stamp the drawings and be responsible for the results, I don't see how an IC would be viewed any differently than a non-licensed member of our firm. But, of course, I'm not a lawyer and the legal profession might look at this somewhat differently.

  • ×Search in:


Please wait... loading
Please wait... loading