We tend to think of America as an economically free country (#6 rank in one study), but with the proposed health care reform going through Congress it is remarkable how many laws an employer can break by employing his or her fellow Americans.
Suppose that you set up a company and hire 10 childhood friends. You don’t want to skim anything from their paychecks, and your wife has a fat government job, so you decide not to take anything out for yourself. Out of the goodness of your heart you’re going to pay for the office space and do the administrative legwork. When a customer pays, you’ll divide up the check into 10 portions and distribute it immediately to your employees. The employees are getting the absolute maximum long-term pay that they could under this arrangement, taking home 100 percent of the revenue from customers.
What laws are you breaking? At least the following:
- you’re not paying for unemployment insurance
- you’re not withholding federal income tax
- you’re not withholding state income tax
- you’re not paying worker’s compensation insurance
- you’re not paying the employer’s share of Social Security and Medicare taxes
- you’re paying people with a 1099 instead of a W2
- though you went to elementary school with these folks, know their mothers, and know for a fact that they were born in the U.S., you didn’t verify to the government’s satisfaction that they were U.S. citizens
- (the new one) you’re not arranging health insurance for your 10 friends
One would naively think that an employer who hands over 100 percent of revenue to employees was a kind and generous person, but it turns out that he or she is breaking more laws than a drug dealer.
[You might argue that it is possible for workers to obtain more than 100 percent of customer revenue, minus any materials costs. Government workers get paid without regard to revenue, productivity, achievement, etc. Some workers on Wall Street and at Detroit automakers obtained more than 100 percent of gross profits because they were able to supplement their compensation with tens of billions of taxpayer dollars. However, the average private sector workforce is limited by revenue from customers.]
[I had to delete a lot of comments from people who assumed that if the employer was not withholding income taxes that no income taxes were being paid. In this case, of course, the employees would pay their own income taxes on Schedule C of the Form 1040 (self-employment income). The 1099 filed by the employer would force the employees to report at least that much income on their Schedule C.]