Employee or Independent Contractor

Are you an employee or independent contractor?

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 Wage and Tax Statement 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 Miscellaneous Income 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, go to our Form 1099-MISC Miscellaneous Income - Enter or Review Information and Independent Contractors FAQs.

To determine if you’re an employee or independent contractor:

The designation depends on the relationship between the worker and the business. Generally, the relationship is evaluated under three categories:

  • Behavioral Control: 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.
  • Financial Control: 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 aren’t reimbursed for 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’re 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 benefits, such as insurance, a pension plan, vacation pay, or sick pay
    • The permanency of the relationship
    • The extent to which services performed by you are a key aspect of the regular business of the company

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 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Related Links

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