All Terrain Thinking

A Compendium of things I think are Important

Generally Speaking, Think on this...

Are you an Independent Contractor or an Employee?

Are you an Independent Contractor or an Employee?

Determining your status is one of the challenges of working at home. Your employer may tell you that you are an independent contractor (IC), but the IRS and your state may consider you an employee. It pays to know which you will be.

The reason many employers tell their at-home employees that they are independent contractors is because they don’t have to provide benefits, unemployment insurance or deal with your taxes. They’re your problem. However, many businesses try to stretch the definition of independent contractor too far, and this can have a major impact on your tax situation.

If you are an independent contractor, you may need to pay quarterly taxes. If you want health insurance, you either need to find your own or have your spouse get it. And, of course, if you're unemployed, finding a job is your problem. You won't be collecting unemployment unless you're eligible for another reason.

While the exact definitions may vary by state for the purposes of your state taxes, the IRS definitions will help you determine your status. From the IRS website:

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories:

• Behavioral Control – Facts that show whether the business has a right to direct and control. These include:
• Instructions - an employee is generally told:
1. when, where, and how to work
2. what tools or equipment to use
3. what workers to hire or to assist with the work
4. where to purchase supplies and services
5. what work must be performed by a specified individual
6. what order or sequence to follow
• Training – an employee may be trained to perform services in a particular manner.
• Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job include:
• The extent to which the worker has unreimbursed expenses
• The extent of the worker’s investment
• The extent to which the worker makes services available to the relevant market
• How the business pays the worker
• The extent to which the worker can realize a profit or loss
• Type of Relationship – Facts that show the type of relationship include:
• Written contracts describing the relationship the parties intended to create
• Whether the worker is provided with employee-type benefits
• The permanency of the relationship
• How integral the services are to the principal activity

For a worker who is considered your employee, you are responsible for:

• Withholding Federal income tax,
• Withholding and paying the employer social security and Medicare tax,
• Paying Federal unemployment tax (FUTA)
• Issuing Form W-2, Wage and Tax Statement, annually,
• Reporting wages on Form 941, Employer’s Quarterly Federal Tax Return.

For a worker who is considered an independent contractor, you may be responsible for issuing Form 1099-MISC, Miscellaneous Income, to report compensation paid.

In short, if your employer can tell you how and when to work and what exactly you will be doing, you are most likely an employee. If you are put through training, you are probably an employee. If you get benefits, such as insurance, you are an employee. On the other hand, if you have expenses the employer does not reimburse, and aren’t told what to do or when, you are probably an IC. All an employer can tell an independent contractor is what result they want, not how it comes about.

Prior | Tell us what you think | Next

Add to Your Social Bookmarks: Del.icio.us Digg Furl Reddit Simpy Spurl Y! MyWeb - StumbleUpon