graphic for The 2018 Index of Predictive Tools in HRTech: The Emergence of Intelligent Software


Most workers are employed by a company and have payroll taxes withheld.

Most workers are employed by a company and have payroll taxes withheld.

In the history of work, we’ve gone from slaves and serfs, to indentured servants, to employees. That transition has resulted in a lot of laws designed to protect workers, including wage and hour laws, rights to organize, and laws prohibiting discrimination. These are all important issues of public policy.

But the dispute about whether someone is an employee or an independent contractor is not about employee protections.

The natural evolution and the technical reality of work is toward more autonomy for workers. We no longer need to show up at an office. We often use our own equipment. More workers than ever are largely self managed and generally accountable only for the end results of their work.

So what’s all the fuss about whether Uber drivers, or house cleaners, or the guy drafting technical manuals on his deck are employees or independent contractors?

It’s about payroll taxes.

The government needs that steady stream of payroll taxes in order to run.

Fed Rev Chart

The federal government will collect 3.18 trillion dollars in revenue during 2015. Of that, 57% comes from income tax and another 34% comes from Social Security and Medicare payroll deductions. That’s 91% of the federal government’s cash collected from workers.

While Social Security and Medicare deductions are held in trust, the government regularly borrows from those income streams.

I could not find a breakdown of how much income tax is collected through payroll withholdings for employees versus how much is paid by self-employed workers who pay quarterlies, or just wait until they file their taxes. However, self employed workers pay less in taxes because they have more deductions, and they pay them both less frequently and less predictably.

Census Bureau data shows that in the US, there are about 116 million employees who work for companies. (This is from 2012 and the current numbers are probably higher.) There are about 10 million self-employed workers. (Although at least one survey puts the number significantly higher.)

So basically, about 90% of workers have payroll withholdings for income tax. If those numbers change drastically, then about 90% of the Federal Government’s cash flow is affected.

And that is why governments care so much about whether workers are classified as employees or independent contractors.

graphic for The 2018 Index of Predictive Tools in HRTech: The Emergence of Intelligent Software

  • maureensharib

    Fabulous numbers/percentages Heather that are seldom seen in print. Few people realize how few people are self employed. Fewer still realize how few are suited to be.

  • Tom Bolt

    Listening to the political rhetoric on both sides of the aisle leaves me with the disturbing conclusion that it is never about us. Do they think we are dumb enough to believe this? To me, it shows a lack of faith in telling the electorate the truth and an underlying belief that the masses are asses. Say any lie often enough and it sounds true. No, this is not cynicism… well, maybe a little.

  • InsiderBlog

    Didn’t the DOL admit in its guidance that more tax revenues was a consideration? Great post, Heather!

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  • In a previous “work life” I did independent contractor compliance in Silicon Valley during the “good days”… 1998 – 2001. Lots of “big boy” companies on our customer list. I got to see some very interesting working relationships between service requestors and service providers…and had to have some very interesting conversations with “workers” around it and got to see how the fed, state EDD, and civil law suits went after companies.

    Heather is spot on..from the government perspective its about taxes and nothing else.

    Funny story…

    I was provided a copy of the IRS training manual.. in it it highlights that if a company sends in a request for help determining whether or not they are in compliance..I think it was called an SS-8 form..the company would get flagged and go on their audit target list. No was in the manual.

    The govt was my employer’s best sales person. They would audit the company based upon a variety of reasons..and the company would call us for help.

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  • Terry Church

    Thanks, Heather. This presents an interesting perspective. The frustrating part is that the government’s approach is to try to perpetuate an anachronistic construct. Society, work culture and technology have evolved in the last 30 years to enable a broader range of productive working relationships. But in the face of the rounding hole, the government just pounds harder on the square peg. Couldn’t the government mandate that companies paying more independent contractor fees than some threshold amount withhold some small percentage and pay it to the government against the taxes to be paid by the contractor? It would be just like W-2 withholding, except it would be a smaller amount. The government gets it’s slush fund, and contractors can claim refunds on their tax returns just as employees do now. Please don’t say this would complicate tax collection — it can’t get more complicated than it is now.

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5 Links: Law & Social Media

Legal Editor Heather Bussing shares five links about social media, company policies, and the law.