6/20/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Independent or contract workers - guidelines"

Dear Dave,

I sell telephone systems in a business-to-business setting. I changed jobs about a year ago and I’m a commission-only contract worker. Everything is going fine with this arrangement, but I’ve been given the option of becoming an actual company employee instead. Their impetus for doing this is worker’s compensation. I can either remain a contract worker – being exempted from their worker’s comp plan – or I can become an employee of the company and take a 3% cut in my commissions to cover the cost for worker’s comp.

My wife is employed full-time and her work covers most of our benefits. I’m also thinking about all of the time I spend doing quarterly tax filings and the other hassles that the self-employed have. How do I decide which option is smarter for me?

John in Jacksonville, FL



Dear John,

I don’t think you actually need worker’s comp. You’re not in a high-risk job. You’re a white-collar sales rep and the likelihood of you being hurt on the job is probably ridiculously low. I also think a good long-term disability policy would cost you less than 3% of your annual commissions.

It’s also important to remember that your status as a company employee is determined by law, not by the whims of the company you work for. There is a list of criteria the law uses to determine if you’re an employee or not. If you get that wrong, the IRS can come back later and undo everything causing you a massive headache. If you’re doing work that doesn’t meet the legal definition of an employee, then the company saying you are won’t make it true. If you want to know more about how the law determines if you’re an employee or contract worker, check out the IRS website at http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html.

As for the choice of being a contract worker or a company employee, you have to weigh both and see which works out better for you. You’ve got to remember, if you’re self-employed you have to pay both the employer and employee parts of the Social Security tax. Are they giving you a commission increase to cover that if you’re a contract worker? If you do become an employee, another option is for them to just eat the extra cost of worker’s compensation. I can imagine the looks I’d get from my team if I suddenly told them I was going to reduce their pay for something like this. They’d look at me funny and I wouldn’t blame them. You’re out there producing for the company and they want to punish you for it. Worker’s comp is one of those costs of operating a business.

-Dave
 

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