Am I an "Employee" or "Independent Contractor" and Why It Really Matters

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When you are an employee?

  • Your employer must pay ½ of your Social Security and Medicare taxes. This equals 7.65% of your income.
  • Your employer must pay unemployment taxes (FUTA) for you. If you lose your job you may be eligible for benefits.
  • Your employer should withhold income taxes, and your share of Social Security and Medicare tax, also known as FICA.
  • Your employer is required to provide you with a W-2 that shows the income you were paid and the taxes that were withheld from your checks.
  • Your employer should provide you with a W-2 by January 31st of each year.

When you are an independent contractor?

  • You pay all of the Social Security and Medicare taxes on your earnings. This equals roughly 15% of your income after business expenses are deducted.
  • Taxes are not withheld from the payment sent to you by the business(es) you work with.
  • You may need to mail in estimated quarterly payments of income, Social Security and Medicare tax.
  • You will need to keep careful track of all income. Some businesses will be required to send you a 1099-Misc and some won't. Whether they have to send you a 1099 is based upon how much money they paid you.
  • You will need to keep careful track of all your business expenses. You will need to deduct them on your Schedule C.

As you can see, your classification as an employee or independent contractor can have a big impact on you. If you don't know whether you are an employee or an independent contractor, it would be a good idea to find out.

What if I don't know which I am?

  • Definition of an employee - An employee performs services for the employer. The employee is subject to the employer's control regarding what will be done AND how it will be done.
  • Definition of an independent contractor - An independent contractor performs work for the business, but the business can only control the result, not how the work is performed.

Three Factors to Consider:

Courts have come up with three factors to look at when deciding whether a worker is an employee or an independence contractor. The three factors are:

  1. Behavioral Control
    Does the business control . . .
    o How, when and where you do the work?
    o What tools or equipment to use?
    o What assistants to hire to do the work?
    o Where to purchase supplied & equipment?
    . . . If so, these indicate control and the possibility of an employment relationship.
  2. Financial Control
    Did you need to make a significant investment in your work? (A significant investment is not always a certain dollar amount, but it must have substance.)
    . . . If so, you may be an independent contractor.
    o Are you reimbursed for all your business expenses?
    . . . If not, and the expenses are high, it may indicate you are an independent contractor.
    o Do you have the opportunity to make a profit or a loss?
    . . . If so, you are more likely to be an independent contractor.
    o Are you paid by the hour and get a weekly paycheck?
    . . . If so, you are more likely to be an employee.
    o Are you paid by the job?
    . . . If so, then this may be evidence of an independent contractor relationship.
  3. Relationship of the Parties
    o Do you get benefits such as paid leave, pension, or health care?
    . . . If so, you may be an employee.
    o Is the service you provide crucial to the business?
    . . . If so, you are more likely to be an employee.
    o Is there a written contract?
    . . . The intentions of the two parties can be very helpful, especially when the relationship is hard to determine from the other two factors.

What If I am Still Not Sure?

  • Who can decide? The IRS has the power to decide whether you are an employee or independent contractor. To ask the IRS to decide, you have to file a Form SS-8. It can take the IRS up to six months to make a decision. In the meantime, you can pay your share of Social Security and Medicare taxes on a form.
  • Can my employer fire me if I ask the IRS to determine my classification? It is unclear whether there are any laws to protect you from being fired. It is not clear whether being fired for trying to straighten out your worker classification would be considered a wrongful discharge. If you are still working for the business, you should carefully consider your situation when deciding whether or not challenging your classification is worth the potential harm to your employment relationship.
Last Review and Update: May 05, 2020
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