New Tax Idea Could Shift How You Hire Local Help

What happened

Labor economist Kathryn Anne Edwards has proposed a solution to the Social Security trust fund shortfall, which is set to run out of money by 2032. As reported by marketplace.org, her idea is to change the tax treatment of the self-employed by taxing the companies that use independent contractors.

The Hidden Cost of 'Cheap' Local Help, Uncovered

For many years, homeowners have sought out local help for tasks around the house, and locals have offered their skills. The way these arrangements are taxed has largely been out of sight for most people. However, economist Kathryn Anne Edwards points out that the current system, set in 1983, has changed with the rise of independent contractors. If you are self-employed, you pay both the employer and employee sides of the Social Security tax, which is 6.2% on each side for the old age program. This is a significant amount that many people pay themselves.

The issue arises, Edwards explains, when companies use independent contractors instead of hiring employees. This practice, sometimes called 'misclassification', means companies avoid paying their share of Social Security taxes and other payroll taxes. They also do not have to follow regulations that apply to employees, such as minimum wage or overtime. For a homeowner, this can sometimes mean that the cost of services appears lower because the company providing the service has fewer overheads related to taxes and regulations. But the material from marketplace.org highlights that this has contributed to a large category of 'you employ but don't pay into Social Security', which was not the case when the program was last reformed.

Shifting the Tax Burden: What Changes for Companies and Locals

Kathryn Anne Edwards' proposal is to shift the tax burden to companies that use independent contractors. Currently, these companies do not pay the employer's half of the Social Security tax for those independent contractors. The core idea is that by making these companies pay their half, it would make using an independent contractor 'not as cheap as they were before'. The goal is to 'neutralize that financial incentive' for companies to choose independent contractors over employees. This could mean a significant change in how companies structure their local help.

For locals doing the work, this could have two main effects. If companies decide to hire more locals as employees, it could mean access to protections like minimum wage and overtime, which the U.S. believes people deserve if they are employed. However, Edwards also notes that if the tax burden moves to the employer side, companies might 'just take that immediately out of what they compensate independent contractors with'. This means a local doing independent work might see their compensation reduced to cover the company's new tax obligation, even if the letter of the law changes. The underlying aim is to ensure Social Security gets more contributions, rather than necessarily increasing immediate take-home pay for every local.

Impact on Your Future Benefits and Service Costs

The current system has implications for the retirement benefits of locals. Edwards explains that self-employed individuals often try to lower their total tax bill by claiming expenses and making their income look as small as possible for tax purposes. While this saves money in the short term, it means Social Security is not getting full tax contributions in real time. Down the road, this often results in self-employed people having lower Social Security benefits in retirement, potentially lower than they expected. The proposed change aims to ensure more consistent contributions, which could lead to more stable retirement benefits for locals who are currently self-employed.

For homeowners, the cost of local services could see an adjustment. If companies face new tax obligations for the independent contractors they use, they may pass some of those costs on to the customer. This could mean that the price for certain services might rise. On the other hand, if more locals are hired as employees, it could lead to more regulated and potentially more stable local service providers, which might offer different benefits to homeowners in the long run. The proposal aims to make Social Security a fairer program, where 'you employ; you pay into Social Security', closing a gap that has grown since the program was last reformed.