EMPLOYEE OR INDEPENDENT CONTRACTOR?

The IRS reminds us that it is critical for business owners to correctly determine whether the people providing services to the business owner are employees or independent contractors. Most significantly, an employee is generally paid a wage, from which the employer is required to withhold and pay over the withholdings to the IRS, and is also required to pay certain payroll tax obligations to the IRS on behalf of the employee. An independent contractor is generally paid a gross amount for his work, from which there is no withholding and there are no payroll tax obligations on the business owner. The independent contractor handles his own income and payroll tax obligations.

The critical distinction between an employee and an independent contractor is the matter of control that the business owner has over the employee/independent contractor. An employee is generally considered anyone who performs services if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker's services are performed. Independent contractors are normally people in an independent trade, business, or profession, offering their services to the public.

Independent contractor vs. employee
Whether a worker is an independent contractor or an employee depends on the relationship between the worker and the business. Generally, there are three categories to consider.
•    Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
•    Financial control − Does the business direct or control the financial and business aspects of the worker's job? Are the business aspects of the worker's job controlled by the payer? Things like how the worker is paid, whether are expenses reimbursed, who provides tools/supplies, etc.
•    Relationship of the parties − Are there written contracts or employee-type benefits such as pension plans, insurance, and vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
Misclassified worker
Misclassifying workers as independent contractors adversely affects employees because the employer's share of taxes is not paid, and the employee's share is not withheld. If a business misclassified an employee, the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes. Workers who believe they have been improperly classified as independent contractors generally must receive a determination of worker status from the IRS. Then they can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

Voluntary Classification Settlement Program
The Voluntary Classification Settlement Program is an optional program that provides businesses with an opportunity to reclassify their workers as employees for future employment tax purposes. This program offers partial relief from federal employment taxes for eligible businesses who agree to prospectively treat their workers as employees. Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS

Who is self-employed?
Generally, someone is self-employed if any of the following apply to them.
•    They carry on a trade or business as a sole proprietor or an independent contractor.
•    They are a member of a partnership that carries on a trade or business.
•    They are otherwise in business for themselves, including a part-time business.
Self-employed individuals, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax, which is social security and Medicare tax, as well as income tax.
 

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About the Authors

John Cocklereece headshot

John A. Cocklereece, Jr.

John Cocklereece concentrates his practice on property tax appeals, business law, tax controversies, and estate planning and administration.
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Attorney Travis Woolen

Travis Woolen

Travis joined Bell, Davis & Pitt shortly after graduating from law school. Focusing his practice on trusts and estates, he regularly advises clients regarding the preparation of simple Wills, Revocable Trusts, and Powers of Attorney, as well as more complex tax planning trusts and other documents to carry out his clients’ desires in a tax-efficient manner. Travis also regularly helps implement estate plans by representing fiduciaries in the administration of trusts and estates.
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