https://www.dontmesswithtaxes.com/2012/04/options-for-taxpayers-who-cant-pay.html
The method by which independent contractors pay their taxes
Proposition 22 is an effort by a small number of app-based companies to push their costs onto the shoulders of their drivers by forcing them to drive as independent contractors, instead of employees. This burdens the drivers with virtually every cost, risk and time wasting inconvenience that is rightfully handled by the companies themselves.
In part one of this blog I outlined some of the major costs that ride-sharing and delivery companies foist onto their drivers. This article will look at how they dump the cost of taxes, penalties, and the burden of having to bear these things onto drivers and how it hurts them.
Here are the related costs, mostly in order of how much they burden the drivers.
-There is no employer to pay half of your social security and medicare taxes.
The IRS requires all employees have 6.2% of their wages withheld for their Social Security contributions and 1.45% withheld for their Medicare contributions (the FICA contributions). Because they are employees their employer must contribute the same amount. This results in the burden of providing protection to the workers being shared by them and their employers.
This is a major reason why the app-based companies keep insisting that their drivers are independent contractors (and desperately beg to remain as such). The full cost of the contributions, 15.3% of the total income, is paid by their drivers. That saves the companies a ton of money. And it goes way beyond just saving money on their direct costs.
When you are an employee not only does the employer have to kick in money, they do all the paperwork as well. The employer automatically deducts your Social Security and Medicare contributions (along with the your withholding to cover your income tax obligation). They then combine it with their contribution to your Social Security and Medicare, and at the appointed time, send it all off to the federal and state tax authorities. The company takes all the responsibility to gather the tax money and send it off at the proper time.
That’s why they want to push this all off onto their employees by turning them into independent contractors. Self employed drivers must do all of this for themselves.
Uber drivers must take responsibility to handle the entire burden paying their own self employment taxes. And this is a hell of a lot of work. They must add up all their SE income from driving (and other side hustles), carefully determine whether or not there is a profit, then calculate the amount of taxes to send off as estimated payments at every quarter.
If this was not hard enough they must make their estimated payments taking into account that they are trying to cover two taxes: the 15.3% amount for the self employment tax (contributions to Social Security and Medicare) as well the amount for the overall income tax. And they had better get those estimated payments in on time.
Since ours is a pay-as-you go system the IRS (and everybody else) demands that self employed drivers must pay taxes on their business profits as they earn them. After all, if they were regular employees money would automatically be withheld when they got their paychecks, with the money then being sent to the government at the appointed time. Same rule for everybody - you pay your taxes as you make your money.
For the self employed driver the pay-as-you go system means that every quarter they must send in payments to cover both their anticipated income and self employment taxes. And the tax people will know if anyone fails to do this. Believe me, they will know. Which means the independent contractor faces another problem that an employee doesn’t.
-There’s a penalty if you don’t make the estimated payments on time.
Because ours is a pay-as-you go system, the self employed driver should calculate what, if any, profit they have made each month from driving. They then should estimate the amount of tax money that they need to pay quarterly to cover both their eventual income and self employment taxes (Social Security and Medicare contributions) on this profit.
Because it is pay-as-you-go the estimated payments must be paid at a certain time each quarter all during the year. Even if they over pay, and get a refund, the self employed will still be assessed a penalty for late or non payment of the mandatory estimated taxes. The penalty is a certain percentage on the amount that they owed but didn’t pay for each month they didn’t pay it or was late in paying it. For example, if they show a profit for the year from their driving, but made no estimated payments except one in December, then they will have to pay a penalty on eleven months of profits on which quarterly tax payments were due but not actually paid. And, the press the point again, the poor driver will still have that penalty even if he/she overpays the taxes and gets a refund. Get that? Even if you grossly over pay your taxes, but are late or fail to make a single estimated tax payment when it was due, you still get penalized.
You can look below at line 24 of the 1040 federal tax return to see where the penalty for late or non payment of estimated taxes will appear.
Is it any wonder that the app-based companies want to push all this onto their “independent contractors”?
Line 24 - penalty for underpayment of yearly estimated taxes
-There is no employer to pay the Unemployment Taxes
This tax is paid entirely by the employers.
In California every employer is required to pay, out of their pocket, a certain percentage of every employees wages to the state of California to provide insurance for them if they are unemployed. The rate schedule and the percentage is based on the first $7,000 an employee receives. New employers can start out at about 3.4%. The maximum rate runs up to about 6.2% or a dollar amount of $434 per employee.
It is easy to see why Uber, Lyft, Instacart and the other app-based companies want to make their drivers independent contractors. As employers they have to shoulder this expense all by themselves. And since they would have to pay this expense for every driver who was an employee their cost would necessarily escalate as they scaled up their operations. No, that will not do - better to push the cost and burden off onto the driver. And why not? According to them the only thing that their drivers want is …. flexibility.
If an employee loses his job he can collect the contributions made by his former employer for up to 26 weeks. If you are self employed as an independent contractor you can do …. what?
Whether you are a full or part time independent contractor driver your options are still the same. When times are hard for the self employed there is nothing but what they have in the bank or can borrow - or maybe sell off. In all the years I have worked as a tax preparer and financial advisor I have never met an independent contractor who had his own self- financed unemployment insurance policy that worked as well as the California Unemployment Insurance program available to all EMPLOYEES.
-There is no employer to pay for workers’ compensation insurance.
This tax is paid entirely by the employer.
This is another huge benefit available to all people who work as employees, but is unavailable to anyone left out in the cold because of being classified as an “independent contractor.”
The cost to the employer of a typical workers’ comp insurance policy varies according to the kind of work that an employee does, how long he/she has been employed and various other things. In 2018 the average cost per employee in California (for workers comp) was about $2.25 per $100 of payroll. This would mean that a company with a payroll of $100,000 would pay a base premium (the basic rate from adjustments up or down would be calculated) of $2,250 per year.
Uber, Lyft, and DoorDash purposely, and wrongly, want to classify their workers as independent contractors because it saves them a lot of money in workers’ comp insurance premiums. This is especially so when a driver’s income is tied to the number of miles that he/she drives - the more miles increases the potential risk of accident, injury or violence. And this leads to the greater likelihood of someone filing a claim.
Just as with unemployment insurance I have never, in my decades of doing tax and investment work, encountered an independent worker who had his own workers’ comp insurance program.
-There is no employer to pay all of the other cost that take money out of a driver’s pocket.
Who pays for the business license? The driver. Who pays for parking or speeding tickets? The driver. Who pays for the repairs when there is a minor fender bender at the airport and it makes more sense to pay out of pocket than to wrangle with the insurance company and possibly face a hike in premiums? The driver. Who pays the penalty if you don’t have enough insurance to cover the gap in time between getting a ride and actually picking up the customer? The driver. Who pays for the medical insurance? The driver. Who pays for the retirement plan. The driver. And who has to pay the FICA taxes and go through the trouble of making sure the government gets their money? The driver.
Do you remember that in the first post we showed that the average Uber or Lyft driver makes only about 9/hour? That’s before they start to pay, and pay and pay. I’ll never forget the look on my client’s face the first time I calculated that his driving for Uber had made him, after taxes and expenses, almost nothing. It wasn’t pretty.
Uphold AB 5 and make the Uber and Lyft and the others pay what they should. Kill proposition 22.
Now proceed to part three.
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