Dollars & Sense
Employee Vs Independent Contractor
Determining if a person is an employee or an independent contractor has important tax consequences. Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your income tax return. The classification also affects your eligibility for employer and social security benefits.
As an employer, the worker classification affects your bottom line and will determine whether you have to file payroll tax returns and include the worker in your fringe benefit plans.
A worker's status is determined by applying a common law test. This test is determined by applying relevant facts that fall into three main categories; behavioral control, financial control, and the type of relationship itself. In each case, it is very important to consider all the facts - no single fact provides the answer.
These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker.
The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work.Â·
If you receive extensive instructions on how work is to be done, this suggests that you may be an employee. Instructions can cover a wide range of topics, for example, how, when, or where to do the work, what tools or equipment to use, what assistants to hire to help with the work, and where to purchase supplies and services.
If you receive less extensive instructions about what should be done, but not how, it maybe less important than directions on how the work is performed.
If the business provides you with training about required procedures and methods, this suggests that the business wants the work done in a certain way, and you may be an employee.
These facts show whether there is a right to direct or control the business part of the work.
If you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
If you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
Opportunity for Profit or Loss
If you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the parties
These are facts that illustrate how the business and the worker perceive their relationship.
If you receive benefits, this is an indication that you are an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
A written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
Frequently Asked Questions
Q: I received a form 1099-Misc from a company that paid all employees this way. Will my income go on line 21 of Form 1040 as Other Income or on Schedule C?
A: Since your income was reported to you on a Form 1099-MISC, the company has treated you as an independent contractor and your income is treated as self-employment income .
You will need to report that income, and any related expenses on Form 1040, Schedule C Profit or Loss from Business. You will also need to use Form 1040 Schedule SE Self-Employment Tax to compute and report your social security and Medicare tax. You may also need to make quarterly estimated tax payments. You would use Form 1040-ES, Estimated Tax for individuals, for this.
Q: What is the difference between a Form W-2 and a Form 1099-MISC?
A: Both of these forms are called information returns. The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee.
The form also reports the employee's income tax and Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration.
A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business who is not an employee. The form is required when payments of $600 or more in rents or services are paid. The form is provided by the payor to the IRS and the person or business that received the payment.
This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping service services to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director Business Development for PBS.
If you would like further information, please contact us at (800) 697-5153.
Please note that the information contained in this article was provided by Internal Revenue Service public records.
"Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional."