You’ve probably met them and didn’t know it. They drive a company truck, they come to your house, and they fix something. Or they come to your house and help you remodel. They might also answer the phone when you order something from a catalog. In fact, they can be found doing almost anything.
They are contract workers. They’re self-employed. They may do all of their work for one company, but they aren’t employees.
So they don’t have benefits.
That means no employer-paid health insurance. No vacations. No sick time. No unemployment benefits. No 401(k). They walk the tightrope of the American workplace without a net. They have, some say, the thrill of complete freedom.
I’ve met a lot of these workers lately as my wife and I started our manufactured home restoration project. From what I’ve seen, it’s a very tough life. The joy of complete freedom is, more often, a sustained dull terror.
When you look at where their money goes, you begin to understand. What they have, mostly, is a lot of payments to make. And those payments must be made before they can pay rent, buy food, keep their car running or buy a pair of socks.
Tools for measuring worker costs
To examine the up-front costs of being a contract worker, I used two online sources. One was an income tax calculator on the smartasset.com website. You can use it to calculate your total tax burden. In this case, I was using it to check the federal income tax and employment tax for workers in Texas.
Another source was the Health Insurance Marketplace Calculator on the Henry J. Kaiser Family Foundation website. It calculates the net cost of the Affordable Care Act insurance policy according to where you live, your income and your household size. I assumed a single worker, age 30, living in Dallas.
What happens to incomes from $15,000 to $45,000
As you can see from the table below, a contract worker earning $15,000 a year – only $2,510 greater than the $12,490 federal poverty guideline for 2019– would have to pay nearly 20 percent of income to cover the combined obligations of the employment tax, income tax and out-of-pocket premium costs for health insurance.
Some may argue that the cost of health insurance premiums isn’t a tax, but it certainly acts like one: As your income increases, your required premium increases. In any case, the bottom line for most workers is their take-home pay, the cash they can actually spend.
Fat cat taxes on moderate wage earners
At an income of $45,000, the total burden has risen to 35.0percent of income. To put that in perspective, a high-earning single worker needs to have a taxable income over $160,725 to have a marginal income tax rate of 32 percent. The top tax rate anyone pays, at any income level, is 37 percent. So contract workers making $45,000 may have trouble making rent, but what comes off the top is right up there with the fat cats.
The High Cost of Being a Contract Worker |
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| This table shows the rising cost of the employment tax, federal income tax and required net health insurance premium for a 30-year-old single earner in Dallas. Note that the cost of the after-subsidy premium for health insurance exceeds the amount paid in federal income taxes well before income reaches $20,000. All figures are annual. | |||||
| Income | FICA (15.3%) | FIT | ACA net premium | FIT+ACA as % income | Total Burden % |
| $15,000 | $2296 | $300 | $312 | 4.1% | 19.4% |
| $20,000 | $3060 | $800 | $972 | 8.9% | 24.2% |
| $25,000 | $3940 | $1370 | $1642 | 12.0% | 27.0% |
| $30,000 | $4590 | $1970 | $2484 | 14.8% | 30.1% |
| $35,000 | $5396 | $2570 | $3324 | 16.8% | 32.3% |
| $40,000 | $6340 | $3170 | $3948 | 17.8% | 33.6% |
| $45,000 | $7540 | $3770 | $4440 | 18.2% | 35.0% |
| Sources: www.smartasset.com; www.kff.org | |||||
How the contract worker 20 percent lives…
According to a 2018 NPR series about contract workers, they now account for 20 percent of all workers and may account for 50 percent in the not very distant future. The implications here are painful:
— Life’s Better Underground. If you’re a contract worker having trouble making ends meet, under-the-table work is almost a necessity. You might even dare to go naked, avoiding buying health insurance even though it’s subsidized. There’s a big temptation to minimize reported income to reduce all three costs.
— Congress talks trivia a lot. When they talk about the federal income tax, they’re talking about tiny changes for most workers. The employment tax simply dwarfs the federal income tax. The cost of health care premiums, even subsidized, isn’t far behind.
— Company-provided health insurance is a mixed blessing. It protects workers from the direct burden of health insurance. But it makes changing jobs difficult, crushing worker mobility while suppressing wages. It’s the modern form of serfdom.
— However you slice it, health care is simply too expensive. At an income level less than $20,000 a year, health insurance premiums – after subsidy — are a greater burden than the federal income tax.
Related columns:
Scott Burns, “This old mobile home: Raze or Save?”, 1/12/2019
https://scottburns.com/this-old-mobile-home-raze-or-save/
Sources and References:
Federal Income Tax Calculator on the Smartasset.com website: https://smartasset.com/taxes/income-taxes
Kaiser Family Foundation subsidy calculator: http://www.healthreformbeyondthebasics.org/kaiser-family-foundation-subsidy-calculator/
The Tax Foundation: 2019 Tax Brackets https://taxfoundation.org/2019-tax-brackets/
Federal poverty level guidelines and chart https://www.thebalance.com/federal-poverty-level-definition-guidelines-chart-3305843
The Rise of the Contract Workers, NPR special series https://www.npr.org/series/579833363/the-rise-of-the-contract-workers
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: by Pixabay on Pexels
(c) Scott Burns, 2019