Tax Tip: Independent Contractor (1099) versus Employee (W2)

This question seems to come up more often than not – Am I (should I be considered) an independent contractor  or an employee?  The answer to this question is critical for both the employee (who could lose benefits, such as the right to claim unemployment, and incur higher tax liability) and the employer (who could incur interest and penalties in the case of misclassification).

So how do you define an independent contractor?  And what do you do if you believe you have misclassified?  Let’s take this one step at a time…and start with the definition of an independent contractor, or at least how the IRS defines it.  The IRS uses three broad categories to determine IC status:  Behavior Control, Financial Control and Type of Relationship.

“Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.  Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.  The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.”

What do you do?  As with most things, the lines can get murky so if are unsure about your work status or think that you may have been misclassified,you can ask the IRS to make the determination by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).


Related: 
Employee vs. Independent Contractor – Ten Tips for Business Owners
Publication 1779 
Publication 15-A
Form SS-8

Publication 1976

Disclaimer:  This blog post/article is not meant as tax advice.  Please consult a tax professional regarding your specific situation.

 

Q&A: Self Employment Taxes

Q: I have started a small business. How do I report (tax purposes) payments to me as the owner? Is that considered income for self-employment or is the net profit from the business used for self-employment taxes?

A: For tax purposes, if you are a sole proprietor, the net profit of the business is used to figure out your self – employment taxes. Other types of organizations have different rules, but most use the amount actually paid to you to figure self-employment tax upon. This can vary from one geographic area to another.

However, no matter what business structure you have, corporation, LLC, partnership, or sole proprietorship, you should accurately track amounts that the business pays directly to you or to others for your personal items as these are paid out. Create an equity type account, use your name & the word “draws” as the account name (example: “Joyce Washington – Draws”), record these payments in this account.

In the long run, it helps to keep better track of how your business is performing if you input the payments as they are paid. Then when it comes time to figuring out your self-employment tax, you will have everything you need to determine the tax amount in one easy location.

 

Pin It on Pinterest