For legal and tax purposes, this is important for any worker to know. Your classification affects how you pay your federal income tax, social security and Medicare taxes, how you file your tax return, and whether you may be liable for acts while you are working. If you aren’t sure if you are an independent contractor or an employee, you should find out… and now!
You can find some guidance to this question by knowing that the courts have considered many facts in deciding whether you are an independent contractor or an employee. These relevant facts fall into three main categories:
(1) Behavioral Control;
(2) Financial Control; and
(3) Relationship of the Parties.
In each situation, it is very important to consider all the facts – no single fact provides the final answer.
1. BEHAVIORAL CONTROL
These facts show whether there is a right to direct or control how you do your work. You will considered an employee when the business has the right to direct and control over you while working. The business does not have to actually direct or control the way your work is done- as long as the employer has the right to direct and control your work. For example:
a. Instructions- if you receive extensive instructions on how work is to be done, this suggests that you are 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;
b. What assistants to hire help with your work; and where to purchase supplies and services.
c. If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed. For example, if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.
2. FINANCIAL CONTROL
These facts show whether there is a right to direct or control the business part of your work. For example:
a. Significant Investment-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.
b. Expenses-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.
c. 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.
3. RELATIONSHIP OF THE PARTIES
These are facts that illustrate how the business and you may perceive their relationship. For example:
a. Employee Benefits- If you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
b. Written Contracts- a written contract may show what both you and the business intend. This may be very significant, yet not controlling the final outcome.
c. Your employer must withhold income tax and your portion of social security and Medicare taxes. Also, your employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay.
d. You may deduct un-reimbursed employee business expenses on Schedule A of your income tax return, but only if you itemize deductions and they total a certain percent of your adjusted gross income.
e. The business may be required to give you Form 1099-MISC., Miscellaneous Income, to report what it has paid to you.
f. You are responsible for paying your own income tax and self-employment tax (Self-Employment Contributions Act-SECA). The business does not withhold taxes from your pay. You may need to make estimated tax payments during the year to cover your tax liabilities.
g. You may deduct business expenses on Schedule C of your income tax return.
NOTE: All statements herein regarding tax implications must be confirmed with the reader’s CPA, and this author does not warrant or profess to be a person qualified to render tax advice.
Mark A. Alexander
5080 Spectrum Suite 850
Addison, Texas 75001