Do you have an employee or contractor working for you? Workers can be either an employee or independent contractors. It would be a good idea to get this issue squared away at the beginning of a business relationship. Confusion on the part of the employee or employer can be a costly mistake. Employees are treated as taxable workers subject to payroll taxes. Independent contractors are self-employed individuals who are responsible for paying their own taxes. Contractors payments are reported on a form 1099. The reporting requirements are also different for both groups. A 1099 is required to be sent to the contractor if you made payments to them that totaled $600 or more in a tax year. Employees earnings are required to be reported on W-2.
The facts surrounding the relationship will provide evidence toward the degree of control and independence. The facts are broken down into three categories.
- Behavioral Facts: Surrounds the issue of if the company controls or have the right to control what the worker does and how the worker does the job?
- Financial Facts: This area focuses on the the business aspects of the worker’s job controlled by the payer. Does the payer pay all of the expenses, supplies all of the tools or supplies, how does the company actually pay the worker?
- Type of Relationship: Do you have any written contracts? Do you provide any employee type benefits for the worker like a pension plan, health insurance, etc.? Will the relationship continue and is the work performed as a key aspect of the business?
An independent contractor is a self-employed person. In this business relationship the entity paying you have the right to control or direct only the results of the work. The independent contractor should be controlling what will be done and how it will be done. The earnings of a self-employed person working as an independent contractor are subject to Self-Employment Tax. They are responsible for their own FICA and income tax withholdings as an employer and employee.
A person is not considered an independent contractor if the services they perform services that are controlled by an employer. When the entity paying you is controlling what will be done and how it will be done. This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If have an employer employee relationship the person hired is not an independent contractor and their earnings should not be subject to Self-Employment Tax. The employer is responsible for withholding taxes.
If after reviewing all of the facts your employee or contractor relationship is still not clear it might be a good idea to file form SS-8 with the IRS. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The form SS-8 can be filed by the business or the worker. The IRS will review all of the facts and circumstances and provide you with an official determination of your worker’s status. This determination is not quick it will take months before getting the response. This is a good idea if you plan or hiring workers for similar roles in the future.