Tax isn't the only issue. The parent poster already mentioned another one: employment contracts generally have some provisions against competing with your employer that require you to get clearance for other jobs. Another is a payment is never without strings attached and those strings might not be something you want to deal with unless you can live off of the project.
Most places they don't prevent what you describe. There are usually just some extra hoops to jump through and/or some tax implications.
E.g. I'm in the UK. I've been a contractor with multiple contracts as well as with a single employer both in situations where they are obviously acting as an employer, and in situations where they were genuinely not.
Here there's specific legislation to handle this now - "IR35", which ensures that if your contract is equivalent to employment you'll be taxed accordingly, with an "umbrella company" acting as an employer on behalf of the company that you're contracting with if that is the case to prevent there from being a tax advantage from pretending to be freelance if you're in effect an employee. It doesn't stop you from doing it - it just takes away the tax advantage and creates some bureaucratic hurdles.
But it's easy to avoid as long as you're not trying to avoid taxes, by setting terms that ensures it doesn't match the criteria. Employers are often keen to do this, and it gives you extra negotiating power.
E.g. when I was doing this, key points involved the fact I had a small marketing budget to bring in additional work, I didn't usually work out of their office, I controlled my own hours, I determined how to carry out the work, I negotiated my day rate, the contract had a defined end-date (we could renew, but there are pitfalls there), and so on. Another strong sign you're genuinely not an employee is a right to substitution (e.g. if you can provide someone else to do the work, when you're not available and that right is genuine). UK tax authorities (HMRC) has a checklist as to what they consider "deemed employment" and or that falls under IR35 (it's not an absolute set of criteria, but basically the more you look like a business, the more likely you are to be considered one).
So for high earners like software consultants with an actual reasonable power balance vs. the other side, this is rarely a problem. It cost me a tiny proportion of my revenues to make sure that I met more than enough criteria to be able to do as I pleased.
But most of the people these regulations are there for are in a substantially weaker position. If you're a low enough earner to not be in a position to work around this, then you're not likely to have the power to genuinely negotiate either.
Lately most of the companies I had an interview with wanted me to be a contractor (most of the time with all the benefits of being a contractor removed, from a law standpoint this is possible), this is a common practice around here, not just out of caution, but for tax evasion as well.
There's not much I can do, it's so common a practice nowadays (literally all of my team members are in a similar construction and we are working on fixed projects from nine to six) that with my next workplace I will do the same.
I think it’s mainly taxation and the legal issues.
Tax should not be an issue if you are paying someone as an independent contractor. Their tax arrangements are on them.
If you have an employment arrangement however, then you begin to hold responsibility for ensuring that local taxes are paid. You need local payroll, relationships with tax authorities etc.
Legally, again you are mitigated somewhat if you use a B2B contractor relationship, but HR, Data Protection and liability rules are going to be complex and risky for the hiring entity. Imagine if you misunderstand vacation or pension rules in Timbuktu and find yourself in a lawsuit with an aggrieved employee.
The important caveat that is that in many jurisdictions, there’s a significant difference in the tax treatment of contractors vs. employees, and so by producing such a contract (that forbids subcontracting) you are plausibly creating an employment arrangement and are on the hook for tax consequences.
Here in the UK, for example, if you wrote such a contract, it would be enforceable… but you would be considered (by the tax authority) to be trying to evade employment taxes, and hit with something starting in the range of a low 5-figure financial consequence (assuming the contract was a few months at current average rate for tech workers).
All of my contracts explicitly allow subcontracting in order to comply with tax law.
The problem is caused by the IRS and HMRC having secondary effects that make employers do this - whether every subcontractor sound be a subcontractor an employee is a different issue.
There are arguments on both sides eg a Freelance Director of Photography is not going to want to be taxed as an employee.
they should hire you under different contract where you are responsible for your taxes, not the employer, something like freelance contractor, not familiar with US law
lowering salaries because company must adjust your taxes is lame excuse
I think an awful lot of employers would prefer you were a contractor; in the USA at least, it is the IRS/government that prevents this from happening more by putting the fear into said employers that they will be fined and forced to pay back taxes for anyone improperly classifying people as contractors when they are in fact employees.
Require in the contract that you are not their only client, but lawyer it well. "We only work with contractors with a diverse set of clients as we believe that diversity promotes excellence."
In some countries (I think UK is like this), they will actually look at the amount of work a "contracter" does for a client. Do too much (i.e. only work for them) and they (the taxman) treat you as an employee. Doesn't matter what you put in the contract.
This sounds like basically just having an employee but with different legal standing as a loophole or something.
Contracting is completely different, you generally define a set project to complete, do it, and get out.
In the UK there's something valled IR35 which means that in order for you to be considered an independent entity for tax purposes you should have full control over working hours, practices, etc.
The employee / contractor thing may be a violation of IRS regulations (depends on a lot of factors). Lying to obtain a contract, and lying about who is doing the work and who has access to any sensitive materials related to the work is straight up fraud, so I wouldn’t want to get into a legal pissing match over it.
In many jurisdictions, the US included, whether or not you are a contractor is not up to you and the company you do the work for. E.g. even if both parties think it’s a contracting relationship, the IRS can decide otherwise.
The nature of the relationship, and the work you are doing determines whether your employer is a regular employer and what taxes they have to pay. In Canada, for example, certain taxes (GST) are applied to the contractor relationship based on whether the product the company sells is available within the country, and the distinction between contractor and employee is much less fuzzy than it is in the US (if you have to ask, the person is almost certainly an employee).
Is is a contract (you are self-employed, pay income tax etc) or is it employment (company employee, they withhold income tax, standard W2 form)?
Contracts pay more, lot at least they should, because the contractor has a higher risk, less benefits (e.g. no holiday entitlement), more cost (taxes, insurances) and liabilities (as a contractor you need to have insurance in case you screw up while working).
That's not a problem. The point in the tax code is to prevent offloading the tax liability by classifying people who are rightfully employees as contractors instead.
I'm reasonably certain the tax code has no regulation that says you must be classed a contractor if you meet certain criteria.
Good luck with that. The IRS has very specific rules for who can be considered an employee and who can be considered a contractor. Attempting to treat people who should be employees as contractors is one of their number one enforcement goals, because contractors don't have withholding and are therefore far less likely to pay their taxes.
Contracts are a matter of contract law, but your relationship with the revenue agency is not bound by that contract.
I am not a lawyer but I do have some experience in this. So, as I understand it if one or both country's agencies decide it is actually an employer/employment relationship they may decide withholding was done/not done in the wrong place, or invalid tax credits etc. were claimed and may assess penalties for that on top of wanting the amounts back. It can also complicate things like VAT collection, etc.
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