Critical Thinking Problem 11.2 Comparing Employees and Independent Contractors.

Question

Critical Thinking Problem 11.2 Comparing Employees and Independent Contractors. The Valley Voice is a local newspaper that is published Monday through Friday. It sells 90,000 coples dally. The paper is currently in a profit squeeze, and the publlsher, Tom Turkey, Is looking for ways to reduce expenses. A revlew of current distribution procedures reveals that the Valley Voice employs 100 truck drivers to drop off bundles of newspapers to 1,300 teenagers who deliver papers to individual homes. The drivers are paid an hourly wage while the teenagers recelve 4 cents for each paper they deliver Turkey is considering an alternative method of distributing the papers, which he says has worked in other cities the size of Flower Mound (where the Valley Voice is published). Under the new system, the newspaper would retain 20 truck drivers to transport papers to five distribution centers around the city. The distribution centers are operated by Independent contractors who would be responsible for making their own arrangements to delver papers to subscribers' homes. The 20 drivers retained by the Valley Voice would recelve the same hourly rate as they currently earn, and the independent contractors would recelve 20 cents for each paper delivered. 2. Assume the following Information: a. The average driver earns $42,000 per year b. Average employee Income tax withholding is 15 percent c. The soclal security tax is 6.2 percent of the first $122,700 of earnings d. The Medicare tax is 1.45 percent of all earnings. e. The state unemployment tax is 5 percent, and the federal unemployment tax is 0.6 percent of the first $7,000 of earnings. f Workers' compensation insurance is 70 cents per $100 of wages. g. The paper pays $300 per month for health insurance for each driver and contributes $250 per month to each driver's pension plan. h. The paper has liability Insurance coverage for all teenage carriers that costs $100,000 per year. Prepare a schedule showing the costs of distributing the newspapers under the current system and the proposed new system.

Explanation / Answer

So current system is better

Current Proposed Daily Annually Daily Annually Copies 90000 32850000 No of employees Copies 90000 32850000 No of employees 100 20 Health Insurance 300 12 3600 360000 Health Insurance 300 12 3600 72000 Liability ins 294 1 294 29400 Liability ins 294 1 294 5880 Medical tax 752.405 75240.5 Medical tax 752.405 0 Payment per paper 0 0 Payment per paper 0 0 Pension 250 12 3000 300000 Pension 250 12 3000 60000 SS tax 2604 1 2604 260400 SS tax 2604 1 2604 52080 S Unemp Tax 350 1 350 35000 S Unemp Tax 350 1 350 7000 Wages 42000 1 42000 4200000 Wages 42000 1 42000 840000 Fed Unemp tax 42 1 42 4200 Fed Unemp tax 42 1 42 840 Total 51890 5264240.5 Total 51890 1037800 Withholding 6300 1 6300 630000 Withholding 6300 1 6300 126000 Payable 4634240.5 Payable 911800 Teenage Teenage Liability 100000 100000 Liability 0 0 Payment per paper 0.04 32850000 1314000 Payment per paper 0.2 32850000 6570000 Total 6048240.5 Total 7481800

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