A question we receive regularly from clients is whether they should file as an independent contractor or an employee at tax time. Employers likewise ask the same question when looking at their staff. It is a topic covered with great frequency and popularity, so if it’s something you wondered – you are not alone!
The IRS.gov website lays out the distinction very neatly on their website. There are several important points to recognize:
Employers must pay careful attention to the distinction when determining what to withhold for employees. It is an important consideration because employers don’t pay taxes on payments to independent contractors. This is in contrast to income taxes, Social Security, Medicare, and unemployment taxes that must be paid on wages to employees.
Three Differences Between Contractors and Employees
There are three common ways to break down the difference between contractors and employees. These categories include behavioral, financial, and type of relationship. For example, with employees, employers:
- Can control what and how the worker does their job and the business aspects of the worker’s job, such as how payments are made and what tools are supplied.
- There are also written contracts on benefits, such as insurance, vacation time, and the like with employees.
- Finally, employees have a relationship that will continue indefinitely.
All of these attributes are in contrast to what makes up a subcontractor. For even more detailed explanations of these 3 determinations, check out Tax Topics.
As an employer or employee, if you are still uncertain as to the correct filing status, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding can be filed with the IRS. After reviewing the individual’s completed form, the IRS will make a final determination as to employee or independent contractor status. If you are a worker and believe that your employer has improperly classified you as an independent contractor, you can utilize Form 8919 to calculate what is due to you.
If you have any questions or concerns regarding the tax implications of contractors vs employees, we encourage you to reach out to us here.