Independent Contractor vs Employee: The Tax Question

Should you hire an Independent Contractor or Employee?  One is not an alternative to the other by the standards laid out by the revenue department. It is therefore crucial that business owners correctly determine whether an individual providing services is an independent contractor or an employee. The general rule is that someone is an independent contractor if the person providing compensation has the right to control or direct only the result of the work and not what will be done and how it will be done. If however, the person paying has the right to not only control or direct the result of the work, but also what will be done and how it will be done, then the person supplying the service is an employee.

Tax Jamaica

If the supplier of the service is an employee then the businessperson has the statutory obligation to withhold income tax in the form of PAYEE, National Insurance (NI), Education Tax (Ed Tax) and National Housing Trust (NHT) contributions at the appropriate rates, and pay over the deductions withheld, along with the matching amounts for NI, Ed Tax, NHT and the appropriate amounts for HEART (Human Employment And Resource Training). If the supplier is an independent contractor then that person is responsible to write his /her own demand for tax and pay over the appropriate amounts so written in addition to filing estimated tax. Don’t be too excited about independent contracting just yet for you may just be liable to a minimum tax.

Many business persons who have employees as well as independent contractors do not understand the rules for preparing a tax return. Some business persons prefer to use their time to concentrate on their core business so they contact an independent tax preparer like A&N Robinson & Associates or the Tax Office to prepare their tax returns. Soon all persons will be required to file a tax return therefore whether you are an independent contractor or an employee, the cards presage that you too will soon be filing a tax return.

A business person cannot decide to convert his/her staff to independent contractors without first contemplating the general rule posited above. For if the TAJ (Tax Administration Jamaica) rules that a contract of service ostensibly with an employee, instead of a contract for service presumably with an independent contractor exists,  the business person will become liable for all statutory deductions associated with a contract of service or an employee status.

Contributor: Neville Robinson is a graduate of Mico and a Fellow Chartered Accountant in public practice with the Institute of Chartered Accountants of Jamaica since 1985. Neville holds the B.Sc. honours degree in Management Studies and a Master’s degree in Accounting. Neville is a partner in the accounting firm A&N Robinson & Associates.

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

Yes, there are opportunities in a depreciated Jamaican Dollar!

Public discussion surrounding the depreciating dollar have been one sided, looking only at the negatives associated with the decline. With the exception of Dr. Damian King (Senior Economist, UWI), I’m yet to see a different perspective on the implications.

Dr King views in summary:

Some Jamaicans (companies, individuals etc.) will lose from the depreciation in the dollar, while others will gain. Since both the winners and losers are Jamaicans operating in the economy, the country is not made worse off with a depreciated dollar.

 King went on to give an example, highlighting that Every purchase of foreign exchange is also a sale. Somebody is selling it. So if you have to pay me $150 for a US dollar, what you lose is exactly what I gain. You pay more, I get more. If the cost of haircuts suddenly rise to $1,500 a head, that is terrible for everyone else but it is great for barbers. The whole country is not worse off because barbers are part of the country. The identical thing is true for any other transaction, including US dollars.

Chinese

Can we follow the Chinese? China has come under pressure from the United States (US), for supposedly manipulating their currency to gain unfair trade advantages – it is widely agreed that the Chinese dollar (Yuan) is undervalued. The argument is that the Chinese keep their dollar undervalued so their goods and services will remain ‘cheap’ and competitive in foreign markets. An undervalued currency also allows for lower cost labour which has resulted in some major US companies moving their manufacturing to factories in China (e.g. Apple & Nike) – outsourcing.

This Chinese example, presents a model for Jamaica. We need to increase production of goods and services and use the depreciated dollar as our competitive advantage. We’re unlikely to compete with China’s manufacturing prowess but services (BPO, Tourism, etc.) could provide superfluous returns.

Outsourcing to Jamaica: As I write, Sutherland International (a US base outsourcing company) is looking to launch its operations on the UWI Mona campus. This venture is expected to see over 13,000 students and other professionals being employed full-time and part-time. A depreciated Jamaican dollar is as much a ‘problem’ as it is an ‘opportunity‘. It is an opportunity for us to embrace a more modern approach in participating in the global world and improving our competitiveness.

Some Opportunities:

  1. A cheaper Jamaican dollar will attract more investors who are looking to take advantage of Jamaica’s educated, yet highly unemployed labor force.
  2. Increase tourist visitors – It will be cheaper for tourists to visit Jamaica and as such more will come (The Land of Usain Bolt & Bob Marley)
  3. We will import less (due to a depreciated dollar) and hopefully increase local production
  4. Local goods & services will become more competitive in foreign markets – locally produced goods/ services will become cheaper.
Tourism Jamaica

Jamaica’s tourism industry (one of our main foreign exchange earners) could also benefit significantly from a depreciated dollar, especially with the expected tax hike for US consumers – what has been termed the Fiscal Cliff. Tax increase will reduce disposable income of US consumers and since tourism is classified as a luxury it will likely be first on consumers ‘cut-back-list’. A depreciated dollar could help Jamaica offset any repercussions to the industry in the event that the US Fiscal Cliff is realized.

Looking at Solutions:

We need to embrace the opportunities associated with a depreciating dollar and look to increase production, exports and services offered globally.

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

SMEs & Market Research

Many Jamaican entrepreneurs (or entrepreneurs to be)  have asked/ or is still asking themselves’ the above question – is market research needed for my new idea?

We’ve found some external insights on the topic, which we hope will provide additional clarity.

 

Galleon (9)

Question as answered by Amy Shropshire on Quora:

Most of the mistakes I’ve seen businesses of any size make have been due to the thinking they know the market place rather than taking the time to actually find out.

For the past 15 years, I’ve been advising clients in the nonprofit and start up world. What I love about them is their eagerness to get going, get their product or service into the hands of their market, and see their dreams come true. The challenge comes when I ask them questions about their market and they can’t answer them. They know all about them, and nothing about their consumers. They expect to put their product out there, do “marketing,” and make millions.

I eventually created a workshop called “No One Cares About You.” where I explained that deep down, consumers don’t really care about you. They care about how you’re going to solve their problem/need/want/desire/etc. And that’s what market research tells you how to do.

I disagree with what Shashank PS says about a completely new product being unlikely benefited from market research. This is where research will benefit you the most – Who exactly is your market? Does the market even want your product/service? Does it fill a need they have? If they don’t know they need it, how can you convince them they do? What channels do they like to be reached on. How much would they be willing to pay? The questions are endless.

I find that most people want to find a way to skip the market research part because its seen as boring. They want to jump right into the fun stuff! But let me finish by saying that the better you know every facet of your market, the more they will want to know you. =)

Question as answered by Matt Bertuzzi on Quora:

There are compelling arguments here for both sides. I have 2 quick thoughts:

1) Market research can hugely beneficial – not unlike learning about the structure of the face and effects of physics. Market interactions are like getting punched in the mouth 1st hand. Imho, you learn more from the 1st and know more from the 2nd.

2) I had no idea I wanted 1k songs in my pocket until I heard Steve Jobs tell me I could have it. Similarly, I might have scoffed at the idea/concept of Twitter in a conference room. But after week 1 using it, I was hooked.

Just my $.02.

See more interesting answers to this question here

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

The Jamaica & IMF Equation

The Equation:

The following outline what I believe to be the most likely economic outcome if an agreement is not reached (soon), between Jamaica and the International Monetary Fund (IMF):

Further exchange rate depreciation

If the Government of Jamaica is unable to secure a deal – in short order – continued domestic concerns, weakening markets and lower investor confidence could result in increased volatility in the foreign exchange market and further slide (depreciation) in the Jamaican dollar. Note that a slide in the Jamaican dollar would make it more expensive for Jamaicans to transact businesses with U.S exporters – put another way, it would be more costly to buy the new Iphone 5.

The recent fall in the in the Net International Reserves (NIR) by more than US$ 236 million during the June 2012 quarter, could indicate that the movement to safer more stable currencies (US$ and CAN$) might be slowly underway.

Further delays in reaching an IMF agreement will undoubtedly cause an erosion in the value of the Jamaican dollar against the currencies of its main trading partners (US$, CAN$ and GBP). Immediately after, the previous IMF deal was signed in Feburary 2010, the foreign exchange market stabilize and the JMD$ strengthened. Currently, the exchange rate is hovering at and around the $90 JMD : $1 US mark (As Seen in above chart).

Increase Interest Rates / Higher Cost of borrowing

The slide of the local currency coupled with the Government’s high level of indebtedness would likely trigger increases in the domestic interest rates. Higher interest rates would be the only incentive for investors to lend the Government money.

Jamaica’s high debt to GDP ratio (seen in chart above), limits the Government’s ability to pay its bills without having to borrow. Additionally, our economy is not growing fast enough to generate sufficient spending for the GOJ to collect tax revenues and earn money to repay its debt. Without a new IMF deal, the Government would have to find alternative money to pay bills, in order not to default on its obligations. Recently it was made public that the Government borrowed money from both NCB and Scotia bank in order to repay foreign debt owing and had matured – not a good sign.

 Further downgrade of Jamaican bonds by Rating agencies

If Jamaica is unable to sign a new deal with the IMF, a downgrade of domestically issued bonds/debt as well as international debt instruments such as the GOJ Global Bonds (GOJGB) would be inevitable.

These Euro-denominated bonds, if downgraded, would signal to investors that these are risky debt instruments with high likelihood of default by the issuing government (Jamaica). In this context, the GOJ would find it hard to generate well needed capital on the international market as its debt instruments would be undesirable to international investors.

Any downgrade would further make a case for higher interest rates when the government attempts to borrow internationally/ locally given the high propensity for defaulting (low credit worthiness) on these debt repayments – as indicated by the rating downgrade.

 Even slower economic growth/ no growth

The global economy is still precariously positioned, with uncertainty surrounding the Euro-zone and China’s economic growth rate slowing. This all equates to even slower growth forecast for developing countries like Jamaica, who rely heavily on consumer welfare in the developed countries to keep their economy vibrant – tourism, bauxite and cultural exports.

Higher inflation rates

The direct outcome of a declining Jamaican dollar, compounded by higher cost for foreign goods – wheat/ flour price being the most recent to increase.

Further losses on the Jamaica Stock Exchange (JSE)

During the June 2012 quarter there was a decline across all four JSE indices ranging from 1.1 per cent to 7.9 percent. This fall in equity prices across the indices reflects the weakness in the domestic economy and growing concerns about the impact of the noted slowdown in the global economy.

Steven Jackson recently wrote an article in the Gleaner, which stated that “investors have lost close to J$73 billion of their wealth” on the JSE – Year to Date. This “bear” market will likely continue once an agreement is not reached.

The above arguments only highlight some of the economic possibilities/ scenarios that might occur in the event of further delays in signing a new IMF agreement. Note that the social and cultural impact was not examined, due primarily to the plethora of possibilities that can arise – one thing for sure though, we are a resilient people who have proven time and time again that we can rise above adversities.

Please add a comment and share your opinion on any of the points which were highlighted.

Visionary Entrepreneur

About the author:

Luwayne Thomas Bsc., Msc.

Co-founder  @balcostics

Follow on twitter: @LuwayneThomas

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here