Contingent Workforce Solutions

May, 2010 - Confused About Portable IC Solutions?

There is a great deal of confusion around the types of portable solutions available to IC's today. The reality is that "one size does NOT fit all". There are several options available to individuals based on their particular needs. First and foremost, however, every IC should be properly vetted to determine whether they are viewed as a legitimate IC or an employee in the eyes of the law. This requires a comprehensive third party service to make the appropriate assessment for your organization. As a part of the vetting process it should be determined whether an IC has established an LLC, S-Corp, C-Corp or claims sole proprietor for tax purposes in addition to sufficiently testing for "direction and control". Once properly vetted and subsequently classified by the third party, there are a handful of options available based on the needs of the individual. Under any circumstance, we believe the vast majority of properly vetted ICs have chosen their independent contractor status for one of two reasons:

1. The "True Independent" - The "true independent" is acutely aware of the tax benefits to being an independent contractor and has chosen to be either a sole proprietor, form an LLC or Corp-to-Corp for a variety of reasons. This model offers the greatest value for deductions, but may require tax and legal expertise for proper filing. Regardless, they view themselves as a vendor or consultant for their projects and perform their work accordingly with a high degree of discretion and autonomy.
2. The "Transitional Worker"- The "transitional worker" is typically performing a temporary contract assignment where there is either a concern about the worker classification, or they wish to maintain their employee status out of convenience. These individuals tend to prefer a more robust group sponsored insurance package for business insurances as well as health and welfare benefits than they could procure on their own, and they are willing to pay a premium for it.

While both of these options are viable alternatives after being properly classified as an IC, they require additional qualification to determine the best fit for the contractor because the worst thing a company can do is to force a "true independent" in to the "transitional worker" model based on the extraordinary costs, limited deductions and lack of control. In turn, a "transitional worker" who is thrust in to a "true independent" situation, but would prefer to remain an employee because they are accustomed to the ease of having taxes automatically withheld and they are willing to pay a premium for these services may resist the IC solution option. Based on these definitions, two models or options tend to emerge:

1. Portable IC or Vendor Status Option (LLC)- This option is for the contractor who wants to "be their own" boss and has chosen free agency as a career. This option is for executives, consultants, and freelancers who are truly independent and work for several clients at one time. These individuals want the enterprise infrastructure combined with the tax benefits and freedom of self-employment. This individual also does not need to pay the added burden of State and Federal Unemployment insurances which are typically the responsibility of the employer.
2. Portable W-2 Option- The portable W-2 option is typically for transitional ICs who enjoy the simplicity of being an employee and are willing to assume the additional costs and associated benefits that come with unemployment insurance and workers compensation. Under this model, the individual is classified as a W-2 worker for tax purposes and they assume all of the statutory burdens that are regularly assumed by both the employee and employer including the full burden for Social Security and Medicare for both employer and employee, federal and state unemployment insurance, state workers compensation and in some cases state disability insurance. With this model, the individual wants the fast and easy solution, and they are willing to pay the price for employer taxes and insurances.

The following matrix outlines the advantages and disadvantages of each option to contractors:

In summary, while we believe both are viable options to contractors, all parties should consider the following:

Contractors considering the portable IC model should explore an LLC structure as it affords them legal protections and formalizes their business structure. As such, having adequate legal and tax expertise is essential, whether it be from referrals or a service provider that offers bundled solutions (See Synergy IC Solutions).

Contractors considering the portable W-2 model (see Synergy IC Solutions) should be certain they adjust their bill rate to clients (typically 10-15%) to account for those "employer taxes" they absorb on the client's behalf. In addition, clients should be willing to absorb these "employer taxes" in their bill rate to the contractor as a cost to the protections it affords, or they should elect a more traditional W-2 payrolling model which affords a "shared" tax structure between the contractor and client (see Synergy Corporate Solutions).

The bottom line comes down to maximizing income and control in favor of the portable IC model versus ease of use and additional protections at a higher costs to the contractor typically afforded to the portable W-2 model. Whichever the option, once cleared for IC classification status through proper vetting, the final decision should be that of the contractor for any portable IC solution.

For further understanding of the alternatives Synergy provides, please see Synergy IC Solutions.

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