Pros and Cons of Contracting

Aztec Driver

Aztec Driver

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Bryon
Setting aside the possible legal ramifications of the situation, what would be the benefits to an employer by paying a pilot for pilot services as a contractor?

What, if any, are the benefits and/or drawbacks for the pilot receiving said benefits.

Other than the obvious tax deduction requirements, are there any other serious "gotchas" to be concerned with, such as liability?
 
Liability-wise you need to make sure your insurance company covers "contracted" pilots...

He is still acting under your direction more or less, so agency law i.e. respondeat superior still applies UNLESS he really is a contractor and does his/her thing when and how they see fit and just delivers an end goal...

For health insurance, you don't have to provide it (not sure how big your company is)

It is the contractor's responsibility to maintain currency (or I would make it that way)

They may also do it for cost-accounting purposes, put the pilots in a different category of contractors rather than have a cost-center for aviation (easy to get cut out of the budget)
 
There are very clear definitions by the IRS of the difference between a independent contractor and employee for an individual. If you are paid as a contractor and then deemed to be an employee in an audit, YOU can be responsible for your portion of all the back payroll taxes, fines and penalties...as well as the employer.

The benefits if you are a true legit contractor is that you can write off dang near everything related to your contract.
 
Shawn said:
There are very clear definitions by the IRS of the difference between a independent contractor and employee for an individual. If you are paid as a contractor and then deemed to be an employee in an audit, YOU can be responsible for your portion of all the back payroll taxes, fines and penalties...as well as the employer.

The benefits if you are a true legit contractor is that you can write off dang near everything related to your contract.
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As the individual (contractor), you are responsible for all taxes for deduction, including the medicare deductions (both halves and federal and state taxes. These are done through the tax return at the end of the year, and through the estimated taxes paid throughout the year.

As a part time pilot, I just wanted to know the reason I was being paid as a contractor,rather than as an employee. Did not consider the health care debacle that is the "AFFORDABLE care act:mad2:"
 
Yeah you are an employee. No use squabbling bout it, they are illegally using you as cheap labor. Get your time and move on. If you don't need the time quit.
 
Aztec Driver said:
Setting aside the possible legal ramifications of the situation, what would be the benefits to an employer by paying a pilot for pilot services as a contractor?
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It's a lot cheaper, the paperwork is a lot simpler, it's usually easier to dump the contracted party if they don't want you, and they can much more easily sue the contracted party for damages if anything bad that happens.

What, if any, are the benefits and/or drawbacks for the pilot receiving said benefits.
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The biggest drawbacks are:

  • Having to pay both halves of your FICA/SSA payments.
  • Not getting taxes withheld so you have to keep up with the quarterly payments.
  • No workman's comp protection.
  • No medical/dental/health/retirement benefits (might not get them as an employee, but it's still more expensive to do it yourself even if there is no employer contribution).
  • No insurance or legal protections and the possibility of being sued by the contracting party if anything bad happens on the job.

Benefits include more flexibility to work when and where you want.
 
Aztec Driver said:
This is really not my choice. I would prefer to be considered an employee, which, probably technically, I am.
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If the situation doesn't pass the IRS's "right to control and direct" test so you are "technically" an employee, the employer has no legal choice but to treat you as an employee. Failing to do so will cost them a whole lot of money and pain if the IRS finds out they're breaking the law.
 
Aztec Driver said:
As the individual (contractor), you are responsible for all taxes for deduction, including the medicare deductions (both halves and federal and state taxes. These are done through the tax return at the end of the year, and through the estimated taxes paid throughout the year.
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Yes, but you can lessen those obligations significantly through write offs and deductions as a contractor that you can not as an employee. If IRS changes your classification in an audit to an employee, they will look at what you would have paid if you were a W2 employee and nail you hard on the difference. Seen it done.

From IRS.gov:

"You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed."
 
Shawn said:
Yes, but you can lessen those obligations significantly through write offs and deductions as a contractor that you can not as an employee. If IRS changes your classification in an audit to an employee, they will look at what you would have paid if you were a W2 employee and nail you hard on the difference. Seen it done.

From IRS.gov:

"You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed."
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I would have a difficult time figuring out how I could control anything about this job, as it is a specific pilot run at a specific time interval, with the possible exception of running it VFR or IFR.
 
Aztec Driver said:
I would have a difficult time figuring out how I could control anything about this job, as it is a specific pilot run at a specific time interval, with the possible exception of running it VFR or IFR.
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It is nearly impossible to be a 'contract pilot' in the aviation business in the US. When I started flying the IRS came down hard on flight schools because they were listing CFIs as contractors and they IRS said "no".
 
Aztec Driver said:
I would have a difficult time figuring out how I could control anything about this job, as it is a specific pilot run at a specific time interval, with the possible exception of running it VFR or IFR.
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You are a fake contractor, you could rat the company out, but that probably won't help you much. Understand your boss is cheap/shady and this isn't a career company. Trade work for money(less then you should get in theory) and experience then move on. The company isn't going to change and go legit to make you happy.
 
Most companies would prefer to pay everyone on a 1099 if they could get away with it.

Know that your 'contractor' can file a form SS-8 which asks to the IRS to determine if your 'contractor' is really an employee. Most states have similar forms.

In aviation the classic case is a flight school that claims it's instructors are 'independent contractors' even though the school sets precise work hours, duties not related to flying (i.e. janitorial duties), break times, and provides the airplanes.

Fairly often employers are assessed back taxes for incorrectly treating employees as contractors.
 
JimNtexas said:
Most companies would prefer to pay everyone on a 1099 if they could get away with it.

Know that your 'contractor' can file a form SS-8 which asks to the IRS to determine if your 'contractor' is really an employee. Most states have similar forms.

In aviation the classic case is a flight school that claims it's instructors are 'independent contractors' even though the school sets precise work hours, duties not related to flying (i.e. janitorial duties), break times, and provides the airplanes.

Fairly often employers are assessed back taxes for incorrectly treating employees as contractors.
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There was a big kerfuffel with the IRS over that when I was training in the late 80s/early 90s. All the flight schools around SoCal had to change their ways, and I know 3 that ended up getting in enough hassle they went out of business.
 
JimNtexas said:
Fairly often employers are assessed back taxes for incorrectly treating employees as contractors.
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Penalties and interest, too, and that can far exceed the amount of back taxes making it very painful for an employer to get this wrong.
 
Aztec Driver said:
Setting aside the possible legal ramifications of the situation, what would be the benefits to an employer by paying a pilot for pilot services as a contractor?

What, if any, are the benefits and/or drawbacks for the pilot receiving said benefits.

Other than the obvious tax deduction requirements, are there any other serious "gotchas" to be concerned with, such as liability?
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The big pro for the employer is that the pilot is not paid when he or she is not needed. The pro for the pilot is that they can block off time when they don't want to be available to that employer.
 
Everskyward said:
The big pro for the employer is that the pilot is not paid when he or she is not needed. The pro for the pilot is that they can block off time when they don't want to be available to that employer.
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Do that as a "contractor" and your contract will go to the next "contractor" in line.

Contracting as a professional pilot is the bottom dwellers of the industry IMO. They all brag about their big "daily rates" but the truth of the matter is they are all undercutting each other for the work. When one proclaims "I get $1000/day" rest assured there is another that will say "Hey, I'll do it for $900!" and the race to the bottom continues.

This is why employers with airplanes love these guys. It's cheaper for them and they just let them bid each other down to the lowest price.
 
RotorAndWing said:
Do that as a "contractor" and your contract will go to the next "contractor" in line.

Contracting as a professional pilot is the bottom dwellers of the industry IMO. They all brag about their big "daily rates" but the truth of the matter is they are all undercutting each other for the work. When one proclaims "I get $1000/day" rest assured there is another that will say "Hey, I'll do it for $900!" and the race to the bottom continues.

This is why employers with airplanes love these guys. It's cheaper for them and they just let them bid each other down to the lowest price.
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But I know some contractors who like it for the reason I stated. Most of these people have other businesses or don't want or need to work all the time.
 
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