Question

Many small businesses have to squeeze down costs any way they can just to survive. One way many businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20-factor test” that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find themselves subject to “self-employment” taxes, by which they bear the brunt of both the employee’s and the employer’s shares of FICA taxes.

Requirements

1. When a business abuses this issue, how is the independent contractor hurt?

If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an ethical issue involved? Who is hurt?

Short answer

1. The contractor must pay “self-employment tax,” representing the employer’s and the employee’s share of normal FICA taxes.
2. It is unethical if a business knowingly treats workers as contractors. Contractors are hurt because they pay a heavier share of taxes.

Step-by-step solution

Meaning of FICA

All employees within the United States are required by law to contribute a portion of their compensation to the Social Security and Medicare frameworks of the nation. This regulation is known as FICA. That proportion coordinates employer commitments to the same programs.

(1) Explaining how is the independent contractor hurt

By law, every employee in the United States must pay into the nation's Social Security and Medicare systems a percentage of their salary. FICA is the name of this regulation. That fraction coordinates employer commitments to the same initiatives.

(2) Explaining any ethical issue involved

Businesses could adopt strong stances on tax matters, which might challenge in court. When a company knows that some of its employees should be considered employees but chooses to treat them as contractors, such action is unethical. It is similar to lying morally. Contractors suffer due to paying a higher proportion of taxes and not having access to employee benefits like health insurance.