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Contract Employes vs. Permanent Regular Employee

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  • Contract Employes vs. Permanent Regular Employee

    Could someone please explain to me what's the difference between the two? I have been offered a position as a W-2 contract employee but I'm not sure what the advantages and disadvantages are as opposed to being a regular employee for a I have to ask the employment agency that finds the assignment what the pay rate the company I will work for is?

    Anyone knowleadgeable please help.

  • #2
    Could someone please explain to me what's the difference between the two? I have been offered a position as a W-2 contract employee but I'm not sure what the advantages and disadvantages are as opposed to being a regular employee for a I have to ask the employment agency that finds the assignment what the pay rate the company I will work for is?

    Anyone knowleadgeable please help.


    • #3
      A contract employee is not a regular/permanent employee in the sense that he is scheduled to work for a set amount of time. Once that time is over, you either renew the contract or look for another job. If it is a long term contract, then you may be eligible for an employment visa.


      • #4
        Companies report that 40%-75% of their highly skilled and highly compensated contingent workers apply originally for regular, full-time employment with the company. For one reason or another the company decides to hire the candidate through a 3rd-party staffing agency or gatekeeper, either as a temp co-employee or as a temp-to-perm (contract-to-hire) co-employee.

        On December 1, 2000 the government lifted the ban on "temp-to-perm" services. The deregulation will mean that firms dispatching temporary workers may add employment placement to the service they provide. In other words, they will now be able to send registered temporary workers to client firms for a certain period, then let the workers stay on as permanent employees of the client firm if that firm and the worker agree to enter an employment relationship on their own. The deregulation had been scheduled since December 1999 when the revised Worker Dispatching Law came into effect. The temp-to-perm arrangement results in dispatched temporary workers being employed on a "trial basis" during their temporary contract period (which is limited to 1-year under the provisions of the revised Worker Dispatching Law). The assumption is that firms and workers can correctly judge for themselves each other's professional requirements and what they have to offer, thereby increasing the likelihood that the parties themselves can do a better job of bridging the gap caused by the mismatching of supply and demand on the ground.

        When the temporary contract comes to an end, both the firm and the employee must confirm their intention to proceed to a permanent contract, and the terms and conditions of the permanent employment must be clearly stipulated. In this regard, firms are also required to give their reasons for not converting the position of a temporary worker to a permanent position to the relevant employee upon the termination of his or her temporary contract. Third, at each stage in this employment process the temp-to-perm manpower suppliers and job placement businesses must safeguard personal information concerning dispatched workers. In anticipation of the deregulation, nearly all temporary worker dispatching companies had already registered as job placement businesses before the change came into effect. In order to arrange for a permanent job contract between a firm and an employee, once there is mutual agreement the placement businesses must obtain permission to provide the job placement service. One major manpower supply company predicted that there would be a demand for temp-to-perm services among (1) new graduates and young people, (2) middle-aged and older workers who have at least 5+ years to work as a regular employee before retirement, and (3) workers currently employed in sales activities.


        • #5
          Government agencies, including the Internal Revenue Service (IRS), U.S. Department of Labor (DOL), Immigration and Naturalization Service (INS), State Departments of Employment, Workers Compensation Departments, State Labor Departments, the U. S. Equal Employment Opportunity Commission (EEOC), and the Occupational Safety and Health Administration (OSHA) make it their business to make sure that all workers are properly registered for public entitlements and that they are protected by rules and regulations governing the workplace. These regulations apply to regular employees. They do not, for the most part, apply to independent contractors. Consequently, several government agencies have estab-lished guidelines, or 'common law factors,' that establish criteria for determining whether individual workers are fully compliant independent contractors or de-facto employees of the client company. The common law factors universally address the issue of control. Employers control the work of employees. They do not control the work of independent contractors. When the IRS conducts an audit of employee status, the auditors look for evidence of control. The IRS training manual published in
          1996 puts it this way: "Following the common law standard, the employment tax regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. This control refers not only to the result to be accomplished by the work, but also the means and details by which that result is accomplished. In other words, a worker is subject to the will and control of the business not only as to what work shall be done but also how it shall be done. It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so. You can download the entire 160 page-training manual at the IRS web site:

          In a 1987 Revenue Ruling [87-41, 1987-1 CB 296], the IRS devised a list of twenty "common law" factors to help companies and IRS agents determine the tax status of individual workers. The 1996 IRS training manual trimmed that list to eleven factors organized in three areas of control.

          - Behavioral control: The right to direct or control how the work is done.
          - Financial control: The right to direct or control how the business aspects of the worker's activities are conducted.
          - Relationship of the parties: How the parties perceive their relationship.

          The courts also invoke common law to distinguish between independent contractors and employees. Companies must treat their independent contractors like the outside vendors that they are, and do whatever they can to avoid the appearance that any independent contractor is really their own employee. The burden of proof is on each company, the employer, to show unequivocally that an independent contractor is not their regular employee. It is not enough that both the
          contractor and the client agree on independent contractor status. If the worker looks like an employee, walks like an employee, and quacks like an employee, the IRS will try to reclassify the worker as an employee. Independent contractors, and employees of independent contractors, must look, walk, and quack like independent contractors, and avoid any appearance that they are really employees of
          their client. In other words, a company that hires an independent contractor is considered guilty until proven innocent. The overwhelming bias of the IRS is to classify all workers as
          employees until the company can prove otherwise. Even if the company ultimately wins in tax court, the negative financial consequences of the IRS attempting to reclassify an independent contractor can be enormous. If the company loses an audit because the "independent contractor" is found to be a regular employee of the client, the IRS can go
          after thousands of dollars in back taxes and penalties - up to and exceeding 41% of the money already paid to each reclassified "independent contractor." The IRS is much more aggressive toward employers than toward reclassified independent contractors because, quite frankly, employers represent a higher potential return to the IRS. At best, the most that the IRS will collect from a reclas-sified contractor is the tax on disallowed business expenses.

          Contractors Can Trigger an IRS Audit.

          It's easy to put all the blame for reclassification in the lap of the IRS and other government agencies, but self-employed independent contractors can themselves pose a significant risk to their client companies. Contractors can precipitate an IRS audit when they decide it is in their best interest to be an employee rather than an independent contractor. What makes this so dicey is the inherently hostile alliance of a self-righteous worker with an aggressive government agency. This might happen, for example, when an out-of-work contractor decides to file an unemployment claim against a former client. Independent contractors can pay unemployment insurance on themselves, but virtually none do. If the State Department of Employment decides that an out-of-work contractor really was an employee of the client all along, it will alert the IRS to collect back taxes from the client for Federal
          unemployment insurance, and this will trigger a wider audit involving Federal and State withholding taxes as well. Another risk arises when a contractor is injured on the job and files a worker's comp claim or state disability claim against a client company. Carpal tunnel syndrome and back problems are common ailments in technical and profes-sional work environments. Worker's comp covers employees. It rarely covers independent contractors. In some states, as in California for example, individuals who are also independent contractors can take out state disability insurance on themselves, but, again, virtually
          none do. There is also the risk that a contractor might damage a client company's property or the property of others, or injure an employee or visitor to the client company while on the job. Many independent contractors do not carry general liability insurance, so the liability could easily pass to the
          client. All of these factors place enormous pressure on companies to avoid using independent contractors if there is any
          question about their compliance with government guide-lines.

          Employers of Record.

          And this brings us to the subject of third-party employers of record. A third-party employer of record employs contract workers who actually work for another company. They do so largely as a convenience to the client company in order to mitigate the risk of reclassification. Employers of record are really just scaled-up temp agencies. Most operate as contractor recruiting firms that match contractors with client companies. A few operate as payroll firms or pass-through agencies that employ contractors only after they have already landed an assignment on their own. Umbrella services are similar to
          pass-through agencies, and they also offer better benefits and tax advantages. Employers of record give contractors the W-2 tax status
          most appreciated by government agencies. They pay all payroll taxes plus state and federal withholding, and because they also provide general liability insurance, unemployment insurance, and workers compensation they
          virtually eliminate most of the risks that may trigger an IRS audit. Because contract employees are bona-fide employees of their employer of record, the client company can treat them, for the most part, like their own regular employees. The company can control both the result to be accomplished by the contractor's work, and also the means and details by which that result is accomplished. In other words, companies don't have to *****foot around agency employees. They can treat them like everyone else on the


          • #6
            The Rise Of Client-centered Temp Agencies

            Notice that the entire argument for third-party employers of record is based on the needs of the client company and not on the needs of the individual worker. This focus on the client has led to the disastrous situation we have today in which contractors are viewed universally as second class citizens, more akin to migrant workers than to highly skilled professionals.
            I believe that contract employees are treated so poorly because of two historical influences that are utterly contrary to the well being of contract employees:

            - The influence of permanent placement recruiting firms.
            - The influence of low-paying clerical and seasonal temp agencies.

            Permanent Placement Recruiting firms are undeniably client-centered, working on either a retainer or contingent basis for the companies that engage their services. They conduct active searches for mid to high level professionals, managers and executives, and when they successfully fill a job order their clients usually pay the recruiting firm between 25%-30% of the first year's salary. A successful candidate becomes a regular employee of the client company, and the recruiting firm has no ongoing responsibility beyond, possibly, a 90-day replacement guarantee. Permanent placement recruiting is real hard work. And a good recruiter can expect to place only one candidate per month. An exceptional recruiter will place two or three candidates. Recruiters usually keep about one-third of the fee, while the remainder goes to the house to cover overhead and owner's profit. In the mid 1980's, when executive recruiting firms first began to expand into contracting, they naturally continued to view the companies as their real customers. By also employing the contractor they satisfied the client's need for a third-party employer of record, but they also satisfied an important marketing need of their own. By employing the contractor they maintained an ongoing relationship with the client. This gave the recruiting firms continuous access to the client for both their permanent placement and contractor recruiting businesses. Additionally, by combining both permanent placement and contract recruiting, the recruiting firms could add temp-to-perm (also called contract-to-hire) contracts to their marketing arsenal. Now companies could try out a potential new hire without actually having to hire the individual. These firms tended to apply the same 30% fee structure to their contractor placements that they also applied to their permanent placements. To that they added about 10% or so to cover the employer's share of payroll taxes, bringing the overall margin to 40% of the billing rate. In some cases they felt justified in taking 50% of the billing rate or more owing to the added administrative overhead involved in payrolling a contract employee.

            Scaled-up Temp Agencies

            The full-service contract employment agency, or
            contractor recruiting firm, is an outgrowth of the familiar temporary employment agency. Companies hire clerical and seasonal temps to perform routine office chores, take
            inventory, do seasonal work, and fill in when various office staff are ill or on vacation. Before the rise of contract employment temps were exclusively low-paid, hourly workers filling part-time jobs that seldom lasted more than a few days or weeks. Temp work was what you did to tide you over while you looked for that next real job. Temping was not your career. True consultants, on the other hand, operate as independent businesses, and they work on very different types of temporary assignments. These career professionals are solution providers who offer their clients project-oriented expertise in the areas of marketing, management, research, technology implementation, and other specialized disciplines. In the early eighties there began a trend toward downsizing that accelerated the demand for highly paid, career contractors. But unlike their project-oriented colleagues, the true consultants, these new contractors were increasingly called upon to perform routine, generic tasks previously carried out by salaried employees.

            The climate for independent contractors -- both
            consultants and generic taskmasters -- changed radically in 1986 when Congress repealed safe harbor for technical contractors working through third-party consulting firms. The Revenue Act of 1978 had earlier established that employers could appeal reclassification by the IRS if the employer's industry had consistently treated certain classes of workers as independent contractors. But section 1706 of the Tax Reform Act of 1986 changed that by amending the Revenue Act of 1978 so that employers could no longer seek relief through safe harbor for the following job classifications:

            - Engineer
            - Designer
            - Drafter
            - Computer programmer
            - Systems analyst
            - Other similarly skilled worker engaged in a similar line of work

            Almost overnight, thousands of independent contractors found it necessary to convert from 1099 status to W-2 status, as client companies grew increasingly fearful of IRS audits that might reclassify independent contractors as employees of the client. A mass hysteria gripped employers, as the IRS begin to reclassify technical contractors working through third-party agencies. The IRS became more aggressive, and employers began to discriminate against all independent contractors, even true consultants and one-person corporations. Employers needed a fallback strategy, and they found it in traditional temp agencies. Because client companies were already familiar with the traditional temp agency model, it was only reasonable to adapt that model to technical and professional contractors. The move was good for clients, and a boon to temp agencies, but it was a disaster for independent contractors. Applying a scaled-up version of the temp agency model to independent contractors disenfranchised them from their own independence. Contractors lost their tax write-offs, they lost their participation in the contract negotiation process, they lost control over the rates they charged for their services, and as a final indignity they were reduced to the status of captive employee. Consider also the matter of unconscionably high fees charged by certain unscrupulous contract employment
            agencies. Ordinary temp agencies bill out their regular temps at only $15 to $25 per hour on assignments that last at most only a few days or weeks. Because marketing expenses and administrative overhead have to be recouped over a relatively short period, regular temp agencies have to take a large cut of the billing rate just to cover expenses and make a reasonable profit. But contractors are not regular temps. They are highly paid career professionals who frequently accept assign-ments lasting months, even years. Scaling up typical temp agency margins creates massive windfalls for contract employment agencies. Agencies make more money per placement owing to much higher billing rates, and they collect those high margins over a period of months, if not years, long after recouping their initial marketing costs. Scaled up temp agencies earn an additional windfall when highly paid contractors on long assignments exceed the annual wage caps for Federal unemployment taxes ($7000), State unemployment taxes (wage cap varies by state), and Social Security taxes ($80,400 in the year 2001). Once the wage caps for these taxes are exceeded, the employer's share of payroll taxes drops by approximately 10% of gross wages, and the agency gets a big raise. Temp agencies love highly compensated contractors on long assignments. Self-employed, independent contractors can look forward to significant savings in the employer's share of payroll taxes during the third and fourth quarters of each year, but scaled up temp agencies invariably keep the savings for
            themselves. Another way the temp agency model fails contractors is in the relationship of the parties. Low-paid temp workers readily accept the notion that temp agencies do them a favor by giving them work. Regular temps are grateful that they have any work at all, and this gratefulness engenders a paternalistic attitude in agency staffers. In short, regular temps are treated like children. Such a subordinate role is inappropriate for highly trained career professionals, including contract employees. Is there any wonder why contractor recruiting firms are so condescending and patronizing towards contractors?

            Recruiting firms admonish both their contract employees and their client companies from discussing billing rates on the grounds that such information is proprietary. But that's just so much baloney. A hallmark characteristic of professional service providers is full disclosure of services and fees. When professional service providers withhold information about service fees they stifle the very competition that keeps quality high and costs low. This is the real reason why recruiting firms maintain a "code of silence" about agency rates and fees. Agencies don't want client companies to know about the obscenely high margins they earn and the ridiculously low wages they pay to contract employees. And agencies especially don't want client companies to know that they are paying the agencies far too much for their contract workers.


            • #7
              Information posted by "guest" was really very interesting...I have never worked as an independent contractor but I have heard that some people even prefer to be contractors as opposed to regular employees for a certain company. They also earn much more than us who work as employees and they can save on taxes as well...


              • #8
                In recent years, the IRS has begun to realize the large sums of potential tax revenue they are losing due to misclassified 1099 independent contractors who should legally be W-2 employees. When a company pays a contractor on a 1099-misc form, they avoid the following: federal and state tax withholdings, deposits and reports, the employer's share of Social Security and Medicare taxes, state and federal unemployment insurance premiums, state disability insurance premiums, Workers' Compensation costs, fringe benefits, vicarious liability for employee negligence, and EEOC regulations. Similarly, when contractors are paid on a 1099, the contractor can deduct many business expenses, and as a result, pay much less in taxes each year. The IRS estimates that it loses between $4-$20 billion per year in unpaid taxes as a result of this misclassification problem. Understandably, the IRS has made it a priority to investigate 1099-misc forms that are turned in at the end of the tax year. The IRS is conducting audits to determine whether or not contractors are being properly classified. Many large companies, that all of us are familiar with have recently been audited, some of these companies include: IBM, Sybase, Microsoft, and Time Warner, just to name a few. After being audited, these companies have been assessed huge fines for being in violation of laws that determine whether an individual should be paid on a 1099 or a W-2.


                • #9
                  When a person is paid on the form W-2, the employer automatically withholds and pays all of the necessary employee income taxes as required by the IRS. These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).

                  When a person is paid on the form, 1099-misc, all money earned by the individual is paid on an untaxed basis. It is then the responsibility of the individual to file and pay the appropriate taxes.

                  An individual that is an independent contractor fills the following roles:

                  - The independent contractor will work with a number of clients.
                  - The independent contractor's role is to accomplish a final result and it's the independent contractor who will determine the best way to achieve that result. The independent contractor will define what the agreed upon "result" is in a contract with your customer.
                  - The independent contractor pays his/her own taxes and files the required government forms.
                  - A city license, business license, and a fictitious name or dba statement will be obtained by the independent contractor. Also, the independent contractor must obtain any necessary permits.
                  - Social Security taxes are the sole responsibility of the independent contractor.
                  - The independent contractor must obtain his/her own benefits including workers' compensation, disability, etc. The independent contractor is not entitled to any typical employee benefits from any government agency.
                  - The independent contractor can deduct business expenses from his/her income tax.

                  There is a lot of confusion regarding independent contractors. Many employers realize that it is not a good idea to pay contractors on a 1099, but believe that if the worker is incorporated, it is okay. This is not necessarily the case. It is very simple to obtain a Federal Tax ID (EIN) number for a business. This ID number is not an automatic protection from misclassification. As always the IRS' 20 Point Checklist comes into play. Ultimately, the IRS is going to look at the work environment and who has control. An individual that is incorporated and working at a company could easily be considered an employee depending on the circumstances.


                  • #10
                    Contractors want to be paid on an 1099 as opposed to an W-2.

                    The IRS has found that when an individual is responsible for paying his/her own taxes, etc., many times it is not as much as it would be when the employer is paying the correct tax amount. This is primarily due to contractors taking full advantage of any potential business deductions so that they pay less in taxes.

                    Clients want to pay contractors on a 1099

                    - Managers are trying to meet budget constraints. When a company pays a contractor on a 1099, the employer avoids the cost of employee benefits, employer taxes, etc. These taxes can be between 13-19% of the contractor's pay. To many managers, these savings are well worth the risk of misclassifying. Managers do not want to pay according to the Fair Labor Standards Act, FLSA (overtime pay). In addition to not paying employer taxes, when a manager pays on a 1099, they do not need to follow the guidelines of the FLSA. The biggest impact of this is in overtime hours worked. According to the IRS, a person paid on an hourly basis must be paid time-and-one-half for each hour worked over 40 hrs (there are a few exceptions to this rule, see FLSA write-up for more details). By paying on a 1099, the employer avoids this extra expense.

                    - Contractors are insisting on it. Many uninformed contractors insist on being paid on a 1099. The impact of misclassifying is much greater on the client. This leaves the burden on the client to determine whether or not they are true independent contractors. Many contractors feel that they should be paid on a 1099 because they are only doing a project for the client. Many individuals, especially the ones with rare skill sets are demanding that they be paid on a 1099 or they will go elsewhere. Unfortunately the client is the one who faces the most in fines, etc., if and when there is an audit. The contractor may have to pay back taxes, etc., but the IRS usually goes after the entity with the "deepest pockets." It is easier for the IRS to audit and collect penalties from one company than from hundreds of individuals.

                    Recruiters want to make placements on a 1099

                    - The profit margins can be greater. Recruiters stand to earn more money when their candidates are paid on a 1099. If the bill rate is comparable to other bill rates, the recruiter can take a larger portion of the margin, because employer taxes are not taken out.

                    - It can be an easier sell to the client. There is no need to follow the FLSA which dictates that time and one half must be paid in most instances. The client just gets one simple bill rate and avoids any overtime issues.


                    • #11
                      Thanks Mella for the info.


                      • #12
                        deport illegal aliens


                        • #13
                          deport guest


                          • #14
                            As I understand it, Mella is saying that companies can pay a person either as an employee or an independent contractor, only according to their wishes, is this correct?


                            • #15
                              I don't see anything posted here lately...will you continue or not? Sounded like a hot subject...


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