The distinction between being an independent contractor and an employee has a bearing on many factors, including how you are going to pay your federal income tax, Social Security and Medicare taxes, as well as how you should file your tax return.
If you aren’t sure of the status of your relationship to your job, here is what you will need to know.
There are three factors that the IRS considers when making a determination as to one’s affiliation with their employer – Behavioral control, financial control and the relationship of the parties.
It is very important to consider all the facts as no one factor can provide a definitive answer.
This factor considers whether there is a right on the employer’s part to direct the amount of work done, or how each person performs the work. If the employer has this right, the individual is an employee.
For example, if you receive comprehensive instructions as to your work position, that take into account such factors as how, when, and where work is to be done, what tools and equipment should be used and where to purchase them, and what assistants you may need – these are all evidence that your employer is directing the work product and the means to accomplish the job, namely, you.
If there is broad training involved as well, this too would indicate that you are an employee.
There is no precise dollar for dollar test, but consider who has the majority investment in your position. Did you purchase your own equipment, tools, transportation, clothing, work space, and other items needed for your job? Or were they provided to you?
Are you reimbursed for any of your expenditures? If you are not, then you are likely an independent contractor. If you can realize a loss, and not just a profit only, then you may also be an independent worker.
Consider how you are paid as well. Are you paid by the hour or salaried? Or perhaps the job dictates the pay. Employees are generally paid a set amount, without overriding consideration as to the quantity of work they perform.
Relationship of the Parties
What kind of benefits do you receive, if any? If you receive health, vision or dental, a 401 plan, a pension, stock options or paid leave, then you likely are an employee.
Is there any written contract that sets out any of what we have considered? This may have the most weight when considering whether one is an employee or contractor.
If you are an employee, then your employer is the one responsible to withhold your federal income taxes. You would have filled out a Form W-4, which advised the employer at what rate you wish to be withheld at.
Your employer is also responsible for withholding Medicare and Social Security taxes, as well as unemployment taxes (FUTA). You will receive a W-2 statement that reflects the totals of these amounts that were withheld.
If you are an independent contractor, you will likely receive, not a W-2, but a 1099-MISC for each job you have performed, or one 1099 for all the work you did for a particular payer. The 1099 shows the gross amount you have been paid; no taxes are withheld and it becomes your responsibility to do so.