Determining whether you are an employee or independent contractor is important for federal tax purposes.
If you are an employee, your employer must withhold income tax and your portion of social security and Medicare taxes (unless exempt). You should receive a Form W-2 from your employer showing your total income and the amount withheld from your pay.
If you are an independent contractor, you are responsible for paying your own income tax and self-employment tax. Businesses that pay you for work may be required to issue a Form 1099-MISC to report the amount paid to you, but they will not withhold taxes from your pay. You must report all of your income (even if you do not receive a 1099-MISC) and you may need to make estimated tax payments during the year.
If you are not sure of your status, or if you believe a business or employer has not accurately determined your status, you can file Form SS-8 to have the IRS make this determination.
Whether a taxpayer is an employee or independent contractor is determined based on the relationship between the worker and the business. Generally, the relationship is evaluated under three categories:
Does the business have a right to direct and control how the work is done (through training, instructions, or other means)? The more control the business has, the more likely it is the worker is an employee.
Does the business have a right to direct or control the financial and business aspects of the work? The more control the business has, the more likely it is the worker is an employee. Factors influencing this amount of control include:
- Investment - if you have a significant financial investment in the work, you may be an independent contractor (however, a significant investment is not required to be an independent contractor).
- Expenses - if you are not reimbursed for some or all of the business expenses, you may be an independent contractor (especially if these expenses are high).
- Opportunity for Profit or Loss - if you can realize a profit or incur a loss, this suggests you are in business for yourself and may be an independent contractor.
Type of Relationship
Factors that indicate the type of relationship include:
- Written contracts describing the relationship the parties intend to create
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
- The permanency of the relationship, and
- The extent to which services performed by the worker are a key aspect of the regular business of the company
See the Related Links below for more detailed information regarding these categories.
For step-by-step instructions to enter this information in TaxACT, see Form 1099-MISC and Independent Contractors.