Independent Contractor or Employee? The Changing Relationship between Firms and Their Workforce and Potential Consequences for the U.S. Income Tax
Posted: 11 Jun 2018 Last revised: 12 Nov 2018
Date Written: June 8, 2018
The number of U.S. workers classified as independent contractors has risen dramatically over the last two decades. While this trend, in part, reflects technological changes in how work is carried out, some of the increase may also reflect firms and workers taking advantage of the legal ambiguity between classifications to obtain preferential tax treatment or to avoid complying with regulations. To study this phenomenon, we use U.S. tax returns from 1997-2015 to link firm filings to associated employees and independent contractors. Our descriptive findings show that firm use of independent contractors is increasing on both the intensive and extensive margin throughout the first decade of the 21st century, and accelerates sharply after the 2009 financial crisis. In addition, independent contractor relationships increasingly resemble traditional employee relationships in their economic substance: 60% of independent contractors have relationships with three firms or fewer which last for multiple years, and, for the majority these workers, contract income is the primary source of total labor earnings, not simply a wage supplement. Next, we exploit sharp discontinuities in the marginal cost of hiring an employee, created by size based regulatory exemptions to “pay or play” regulations that require employers contribute to the cost of employees’ health insurance costs. Preliminary analysis confirm that size-based regulation can affect the firm size distribution, and may result from substitution towards contract labor. We discuss empirical strategies to distinguish whether this substitution reflects re-organization in the production process (a real response) or misclassification (an evasion response).
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