Response from Karen Walby on Employee-based Evasion
AFFT Director of Research Karen Walby sent us the following reply to The “I’m my Customer’s Employee” Trick.
Briefly, this is the question of whether you could simply bill yourself as someone’s employee, rather than as their consultant, to help your customer avoid paying the FairTax.
Karen’s answer:
How does the FairTax affect independent consultants? First of all, if a consultant’s services are purchased by a business for business purposes, the purchase of the services is not taxable. Second, if they are purchased by an “end user”, then they are taxable. The customer pays the tax.
Specifically, HR25 requires the consultant (as a seller of services) to add the FairTax on to the bill submitted to his/her customer. They collect the tax and then are required to file monthly (or quarterly depending on sales volume) sales tax returns. When the service provider files his/her monthly sales tax return, he/she will be able to claim a credit for any sales tax they had to pay on items they purchased for business purposes.
An example would be an interior designer selling home decorating services a homeowner. The designer would charge sales tax onto the bill he/she submits to the homeowner. At the end of the month, they would add up all of the sales tax collected from all of their customers, deduct any sales tax they had to pay when they purchased any supplies (e.g., flooring/paint samples), and send the remainder to the state sales tax authority.
Terry thinks that by hiring him as an employee, his customers can get out of paying the sales tax. Terry says “For this to work it would have to be possible for me to be hired as an employee with no more time, effort, expense, or commitments by either the consumer (of my services) or by me than it would be to contract with as a consultant. Is that possible?”
The answer is no, not without you and your customer violating several laws. If a person hires Terry as an employee, then they become an employer. As an employer, they will be required to report Terry’s wages to the Social Security Administration (the FairTax requires this). In addition, state unemployment compensation tax laws require every employer (even if they have only one employee) to file quarterly wage reports on their employees and to pay state unemployment taxes on those wages. In Florida, this would be 2.7% of the wages paid. All states have state unemployment taxes which will remain in place after the FairTax is passed. All states also require employers to pay Worker’s Compensation on each of their employees which is a much higher rate. Every employer, even if they have only one employee, has to register with the state unemployment tax division and file quarterly wage reports and pay unemployment taxes on those wages. For example, in Florida the rate for a new employee is 2.7% of wages. As a registered employer, the person would also be subject to unemployment tax audits.
It is because of the employee related taxes that the “independent contractor” relationship that Terry talks about was invented – to keep from having to pay these taxes on their employees.
If a person is hiring someone to do services at their home (childcare, lawn service, maid services), then HR25 defines them as a “domestic employer” and they would have to pay the FairTax on the wages paid to their domestic employee – just the same as if they purchased the services from Maids are Us or from an independent contractor. The amount of tax they have to pay is the same; but by being an employer they now also have to file tax returns.
Thanks for sharing your expertise, Karen.
