Why would an employer pay wages and NOT take out federal taxes?

Question

I recently had a job offer and the employer is an upcoming small business. They want to hire me for the job, but they said that they would NOT be taking out any federal/state taxes and I would be responsible for paying the taxes next year when I file my taxes with the IRS.

What are the pros and cons to this technique? Is this beneficial to both, me and the employer, or is it just beneficial to the employer? The owners clearly told me that this technique does help them for taxes purposes in the beginning.

Thanks in advance for all the help!!!

Answer 1

This is a tricky one. Do you mean that they will not withhold income tax but will still treat you as an employee? If your "employer" is treating you as a sub contractor and will not give you a w2 at year end watch out. This trick is as old as the hills and I have seen many employers get stung on this. However, you will also be held responsible for the payment of the taxes. You will have to pay Self employment tax on the net earnings on top of income tax for federal and state.

There are many determining factors which come in to play as to wether you truly are an employee under the control of your employer or you are a subcontractor. You should talk to a tax adviser sooner than later so that you do not get stung at year end. Also, remember that if yo get hurt on the job, the "employer" may not cover you since you are being treated as a subcontractor.  

Answer 2

It's illegal for the employer, although if they get away with it, it's financially beneficial to them since they pay less taxes, and have a simpler payroll.  It's not beneficial to you.  You would end up paying some of the taxes they should have paid, the social security and medicare parts.  As far as unemployment and workers comp premiums, neither of you would pay that - you just wouldn't have any coverage if you get laid off, or hurt on the job.

Answer 3

Pros are for them.

Cons are for you.

They can not choose to treat you as a independent contractor if you are not.  You will pay more in the long run.  Plus, if they lay you off, you can not collect unemployment.

Answer 4

depending on the job description, what they are proposing might be illegal - the employer can't just decide not to withhold taxes from everyone - only people properly classified as independent contractors and what determines that is how much oversite management has in guiding your daily activities and the precise type of work - for the employer - they save on employers share of FICA and they will not be paying unemployment taxes - for the worker - very bad - you have to pay your own taxes including the employers share of FICA and since you won;t be eligible for unemployment, if they terminate you - you get no unemployment benefits - without knowing the position they offered you I can;t tell they are being illegal, but I'm guessing they are since they made it clear up from about the taxes. if the gross salary is in line with a regular salaried position for the same job title - I would ask for at least 25% more - plus if they don;t pay medical benefits - you'll have to pay for those out of your own pocket and just for a single person - that may be close to $400 per month (about $4 per hr before tax) - you should ask for that additional amount also on top of the extra 25% and that may not be enough to risk it because of the unemployment issue and being a startup - the risk is here that the company won't last. If their offer was for a permanent position and not a project with a set end date - they can't pay you like an independent contractor - illegal

Answer 5

The employer wants to cheat you by making you pay both halves of social security, not pay unemployment insurance and not pay workers compensation insurance.  In the situation as you describe it, it is so transparently and employer-employee relationship that any idiot should be able to see through it.  Prepare an IRS Form SS-8 to get an official ruling that you are an employee.

Answer 6

Your potential employer is cheating you by misclassifying you as a contractor rather than an employee.

As an employee, you would fill out a W-4, deduct fica/ma (which he'd match), withhold taxes and get a W-2 at the end of the year.  He would pay unemployment taxes, possibly offer paid sick leave, vacation, etc.

As a contractor, you would fill out a W-9, be responsible for the full 15.3% fica/mc as well as making quarterly estimated taxes.  If you stop working you are NOT covered by any laws.  Non unemployment, no vacation, no sick pay etc.

Remember I said misclassification of workers.  The payer does not get to pick and choose which positions are employees and which positions are contract positions.  It's based on facts and circumstances.  If you are paid by the hour, use their equipment, etc, you are almost always an employee.  

Outbound call site?  That's their equipment.  They pay by the hour?  That's a wage.  They'd lose a payroll audit in a heartbeat.

Answer 7

They are hiring you as an independent contractor, you are essential self employed.

They avoid social security tax, Workman's comp insurance, unemployment insurance, health care and other employee expenses.

They are not really hiring you as an employee, they are contracting you as a self employed worker.