Friday, October 26, 2007

Blackwater and Taxes (updated)

The latest outrage against Blackwater is that the outfit is dodging taxes by paying its employees as if they were independent contractors instead of employees, thereby avoiding having to pay Social Security and Medicare taxes on their behalf. Well, I hope that they get convicted and that it costs them dearly, but I sort of fail to see what all the fuss is about. I know the IRS follows this issue, but I'm not sure I understand why.

I know that the employee pays half of these taxes and the employer the other half. If the employer doesn't pay its half it is a tax cheat and the government is deprived of money that is owed to it. But nowadays a private contractor pays the full amount of the employer's share, so I can't see what difference it makes to the government whether Blackwater's thugs are classified as employees or not. If they are then the taxes are paid half and half, if not then the thugs pay all of the taxes themselves, but in either event the amount of taxes paid is the same.

There was a time that a private contractor only paid one half of the employer's share, but that got changed quite a few years ago. So I'm just not quite sure what everybody is getting so breathless about.

I'm not a tax accountant, though, so maybe I'm missing something.

Update: 10/27/07 10:00 AM

It has been pointed out to me that independent contractors get to use the employer's share of Social Security and Medicare taxes as a deduction of income.

So while Blackwater's scurrilous policy does not result in less Social Security or Medicare tax income to the government, it does result in less Income Tax income, because the independent contractor's income tax is reduced. That's why the IRS polices the process.

That's why every year I give my shoebox full of receipts to a guy named Steve. In due course he has me sign a form and either tells me I'm getting a refund or directs me how much to write the check for.

1 comment:

  1. Anonymous4:28 AM

    Of course a contractor gets to deduct the "employer's share" of FICA taxes from his income. That money goes to the government, as it should. But it came to him/her first. If they are an employee, that half is paid by the employer, and it is never seem by the employee--not even on a W2. It isn't income for them. So it shouldn't be for contractors (who are "self employed" in the IRS's eyes) either.