While I hate to admit it, sometimes I disappoint my clients. What else can I do when someone demands a clear answer to a question where no clear answer exists? People understand that clear answers may not exist in cosmology or theology, but expect them in tax law.

What Am I Engaging?
One such conundrum arises when a client asks whether a particular worker should be treated as an employee or as an independent contractor. My first response to this either/or question is a Zen-like “Yes.” After that, though, I must ask for what purpose are we trying to make the determination. Is it for payroll taxes? Pension plans? Unemployment compensation? Workers’ compensation insurance? Wage and hour laws? Collective bargaining agreements with unions? Each of these has its own rules set by a government agency. Many of them vary from state to state. Others have been interpreted (one hesitates to say “clarified”) by the courts, and different regional appeals courts may have reached contradictory conclusions.

What all these criteria have in common is that they are vague and subject to interpretation. All too often, it resembles what U.S. Supreme Court Justice Potter Stewart wrote in 1964 about hard-core pornography: “I could never succeed in intelligibly [defining pornography]....But I know it when I see it.” Sometimes it’s really obvious, as with the plumber you call once a year being an independent contractor, or the full-time cashier at Jewel being an employee. But sometimes it’s, well, art.

The performing arts often occupy that ambiguous middle ground. For example, paying someone a flat fee to work as needed over a two-month period to do props for a show has many of the indicia of both employee and contractor status. A clear dividing line generally appears only when unions are involved. If you are an Actors’ Equity member working within their jurisdiction, you will be treated as an employee. Much the same can be said for SAG or AFTRA. The other unions (such as AGMA, AGVA, SSDC and USA) are less consistent, as they allow their members to work in venues that have not signed collective bargaining agreements.

What Do I Want?
At the other end, an artist will ask me whether it is better to be treated as an employee or an independent contractor. Here, the Zen extends beyond “Yes” to “You must accept that which you cannot control,” for the person writing the checks makes the decision, giving the artist little or no input. But when he asks the question again, the parallel resumes. For what purpose do you seek to know better or worse? If the work is truly independent, the freedom can be exhilarating or frightening. If the work is truly employment, the structure may provide a sense of security or of confinement. Undoubtedly, there are other psychological aspects I am not qualified to address.

What I can address are the financial and tax considerations. If you are an employee and your work ends (that is, the film wraps or the show closes), you can collect unemployment compensation; if you are an independent contractor, you cannot. If you are an employee, you may be eligible for holiday or vacation pay, depending on the employer’s policies; independent contractors almost never are. Employees can be represented by a union; independent contractors banding together may violate antitrust laws. (This is why Equity, SAG and AFTRA are so hard-nosed about employee status.) Some companies won’t even invite the contract programmers in the IT department to the office Christmas party.

So why would anyone want to be an independent contractor? The answer lies in taxes, both income and Social Security. Most employees in regular, nine-to-five jobs have few potentially deductible business expenses, perhaps the occasional book, or perhaps a Christmas gift for the boss. People in the arts are different. No matter how hard you’re working, you’re still paying your agent’s commission, getting headshots, taking classes, traveling to auditions and so on. As an employee, your tax deduction is limited. First, only the amount over two percent of your income is deductible. Then that excess is combined with your other Itemized Deductions, the major ones being home mortgage interest, real estate taxes, state and local income taxes, charitable contributions, and medical expenses in excess of 7.5 percent of your income. And that total deduction only saves you taxes if it is more than the Standard Deduction, which for 2003 is $4,750 for a single person, $9,500 for a married couple. And (he added breathlessly), even then it might not, because of the alternative minimum tax.

In contrast, an independent contractor is regarded as self-employed, running a small business. Like any business, you pay tax only on the profit after deducting the business’s expenses. If your expenses are more than the income, you have a loss which can offset other income like that from your trust fund or day job. This benefit is partially offset by Social Security taxes. When you are an employee, these taxes are withheld from your paycheck, and your employer matches the sum. As a self-employed person, you have to pay both the employer and employee portions (called Self Employment tax). Still, you usually come out ahead because the Self Employment tax is paid only on the profit, and the entire amount paid to you.

I generally suggest that a middle position is best, with some of each type of income. Call it ying and yang. For most people, that’s what will happen anyway, so see it as the best.

Now I’m off to consider how many angels can dance on the head of a pin.

I’ll Give It Up for Free.
If you would like a copy of my “Checklist of Potentially Deductible Items” for those in the performing arts, just call, write or e-mail me, and we’ll be happy to send one out to you.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

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