Independent Contractor or Employee – Which are You?

Worker classification affects how you pay your taxes, and determines how you file your tax return. Have you correctly analyzed all of the relevant facts in your individual situation to determine whether you are an independent contract or an employee?

All relevant facts should be considered in deciding if a worker is an independent contractor or an employee. In each case, the decision should be determined after considering all the relevant facts – no single fact provides the answer. The Internal Revenue Service uses a list of 33 questions on Form SS-8 to determine the relevant facts of an individual case. The facts are categorized as follows:

  • Behavioral Control – These facts show whether there is a right to direct or control how the worker does the work;
  • Financial Control – These facts show whether there is a right to direct or control the business part of the work; and
  • Relationships of the Parties – These facts illustrate how the business and the worker perceive their relationship.

Once all the relevant facts are analyzed, the worker is classified as either an employee or an independent contractor. This decision ultimately determines who pays various taxes and business expenses, and how the worker files their tax returns.

When the relevant facts determine you are an employee, then

  • Your employer must withhold income tax and your portion of social security and Medicare taxes. Your employer is responsible for remitting your payroll withholding, for paying their portion of social security, Medicare taxes, and unemployment taxes, and for issuing you Form W-2.
  • You may deduct unreimbursed employee business expenses on Schedule A of your individual income tax return.

When the relevant facts determine you an independent contractor, then

  • The business you worked for may be required to provide you Form 1099-MISC to report what it paid you during the year.
  • You are responsible for paying your own income and self-employment taxes (this may require you to make estimated tax payments during the year).
  • You may deduct business expenses on Schedule C of your individual income tax return from the amounts you were paid for your work.

Worker classification can be a very complex analysis. Don’t make the wrong determination. Contact Flexible Accounting Services of the Triangle today to assist you in this critical process.