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Why does it matter if you are an employee or a contractor?

It all boils down to taxes.

In this day and age, your status as a worker can actually have severe implications. If you receive a 1099 Misc. income form annually then it means you are an independent contractor. An employee receives a W-2.

How do those two differ? One has a large tax bill.

Independent contractors have to pay their own income tax and self-employment tax annually due to the fact that they haven’t paid enough or any taxes on their income. People who are full-time self-employed also have to pay estimated taxes throughout the year to avoid tax penalties.

This is why I feel that conversations amongst employers and employees must be candid regarding worker statuses.

Below is a pretty good guideline and test to figure out your worker status based upon three factors.

  1. Who controls your work behavior?

  • According to the IRS, an employee is an individual who is told by a business on when and where to work, tools, and where to purchase supplies and services.

  • Instructions from the business are highly detailed to complete their jobs.

  • Evaluation systems are put into place to measure how you accomplish work, rather than measuring results.

  • The business constantly trains you on how to do the job with procedures and protocols.

2. Who controls the financial and business aspects of your job?

  • The IRS looks to examine how much you are investing in your own work equipment.

  • Whether or not you have unreimbursed expenses.

  • Opportunities for profits or losses are present.

  • If you have multiple avenues to provide services.

  • Whether you earn a regular wage for hourly or weekly, even if a commission is present. Independent contractors typically charge flat fees for a job.

3. What is your relationship with the business?

  • Is there a written and signed agreement about your status?

  • Are there job benefits such as insurance, pension, vacation, or time off?

  • How lengthy is the relationship? Is there a specific project or period of work?

  • You provide direct services which are an extension of the business.

There are a lot of gray areas within these distinguishing classifications, with most examined on a case by case basis.

Tax pros such as myself, can help with better knowledge and further questions. We can also help with processes if your status has been incorrectly classified.

What to do if you are incorrectly classified.

You can report your earnings via using Form 8919 (Uncollected Social Security and Medicare Tax on Wage). It allows you to calculate and report your taxes as an employee.

Also, contest your status by filing a Form SS-8. The form will provide facts to the IRS to determine your status as employee vs contractor. Just make sure to keep in mind that it takes a while for the IRS to issue a judgement.

In instances like these, make sure to consult with a tax professional early on to prevent a surprise with a tax bill with penalties to follow.

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