I spoke recently to a friend in the USA who illustrated why Chile needs to stop emulating the USA and start promoting the advantages of living and working in Chile.
The amount of tax that my friend owes to the government depends on the answer to an existential question:
“Are you an employee or an independent contractor?”
Most people in the USA think that I’m an extremist kook because my answer is simple: every independent adult is an independent contractor, and can be an employee only if hiring an employee is similar to adopting a child, and the employer fulfills the needs and wants of the employee as a parent would for a child.
The government has compiled a list of 20 questions to help my friend and others in a similar situation determine the answer. I needed the answer to the same existential question 20 years ago when I was in a similar situation, but there was no Google in the Dark Ages. It can help my friend when she types, “20 questions em” because it will fill in what it anticipates she wants to know, “20 questions employee vs independent contractor.”
How can Google be so clairvoyant? Well, there are millions of people in the USA facing the same dilemma, and the same vexing question is asked so often that Google knows long before the typing is finished that the user is trying to cope with the tax collector, the Internal Revenue Service (IRS).
This is a huge market of potential migrants of rich people who speak English as a native language and want to escape tyranny; Chile should promote and exploit it fully. Most United Statesians would be astonished to find that hardly anyone in Chile pays income taxes.
The answer to the existential question is no small matter for my friend. It is very difficult to earn money in the USA, and many people must travel a great distance to maintain their income, or accept a large pay cut and give their houses back to the banks who financed the purchases. In the case of my friend, she traveled far and flies back to her husband once each month, and he flies once a month to her.
If my friend lives with her husband and she is an independent contractor, the apartment she rents and the cost of the airplane flights that they make to maintain their marriage constitute legitimate business expenses. If she lives in the distant city, neither are business expenses, so her profit is much larger and she owes thousands of dollars more to the government. Where does she live? Has she separated from her husband, or are they happily married? Do they possess the right to maintain their marriage without being punished by the government?
She signed a contract that states that she is an independent contractor, but that is insufficient to persuade the IRS, who could rule that her status is a sham. Instead, she must consult the 20 questions and if she answers “yes” to any one of them, she may be an employee.
How many of the questions must she answer “yes” to before she knows for certain that her contract is wrong, that she is in reality an employee? The IRS doesn’t say. The IRS has not updated the guidance since I was in a similar business 20 years ago; they believe it is not important to make clear laws, even if Google says that millions of citizens are confused. She could answer “yes” to all 20 questions and still be an independent contractor. The law is deliberately vague so that the government can terrorize the citizens.
There are 3 ways that my friend can determine whether, in the eyes of the government, she is an employee or independent contractor.
- First, she can hire a lawyer or accountant to review the case law of people that might be similarly situated, but there is no guarantee that the circumstances in any case are substantially the same, and the person she hires could be incompetent.
- Second, she can fight the government in court, and sometimes citizens prevail, but my friend is not convinced that she will receive an unbiased ruling because the tribunal is run by the government.
- Third, she can request a ruling using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and if she disagrees with the determination, she must resort to one of the first two options.
It might be risky for my friend to request an SS-8 ruling because that would alert the IRS to the possibility of paying closer attention to her. The IRS only audits 1% of all tax returns and is likely to accept whatever determination my friend reports on her taxes, but there is no guarantee that she will be left alone; the possibility of increased scrutiny from the IRS frightens United Statesians so much that they often pay more than they owe merely to avoid scrutiny. They are frightened lambs, not macho Latins spoiling for a fight!