The answer is important for tax purposes because it shapes how you report your income.
When you are an employee, your employer must withhold income tax and your portion of Social Security and Medicare taxes (unless exempt). You’ll receive a Form W-2 that shows these deductions from your employer.
When you are an independent contractor, you’re 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 won’t withhold taxes from your pay. You must report all of your income (even if you don’t receive a 1099-MISC) and possibly make estimated tax payments during the year.
For step-by-step instructions on how to enter this information in TaxAct, see Form 1099-MISC and Independent Contractors.
The designation depends on the relationship between the worker and the business. Generally, the relationship is evaluated under three categories:
If you’re not sure of your status, or if you believe a business for which you work hasn’t accurately determined your status, file Form SS-8.