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.
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.
