Are your contractors really employees?
It used to be that when the word contractor was mentioned, one’s thoughts were of the construction industry. That is no longer the case. There has been a tremendous growth in the independent contractor field specifically in consulting and technical services.
The distinction of whether someone truly is a contractor or actually should be treated as an employee holds some major implications, tax and otherwise.
The distinction between employee or contractor is determined on the facts and circumstances of each case. The three main areas in which the facts decide a person’s status are: Behavioral Control, Financial Control, and Relationship of the Parties.
A contractor generally has a projected outcome but are not told how to achieve the goal.
Employee designation is enhanced if the instructions of how the work is to be done include items like:
· How, when or where to do the work
· What equipment or tools to use
· What assistants to hire
· Where materials and services must be purchased
Also if the business provides training about specific procedures and methods, employee status is suggested.
The things that are looked at in this area are to show if there is a right to direct or control the business part of the work.
· Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
· Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
· Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the Parties:
These are facts that illustrate how the business and the worker perceive their relationship. If you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. A written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
The determination of employee vs contractor status severely affects the person being paid.
If you are an employee:
· Your employer must withhold income tax and your portion of social security and Medicare taxes. Also, your employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay.
· You may deduct unreimbursed employee business expenses on Schedule A of your income tax return, but only if you itemize deductions and they total more than two percent of your adjusted gross income
· You can contribute a maximum of $5,500 ($6,500 over 50) to IRAs and $18,000 to employer sponsored 401(k)
If you are an independent contractor:
· You should get a Form 1099-Misc from any client that paid you more than $600.
· You are responsible for paying self-employment tax. This tax (currently 15.3% up to $118,500) takes the place of the employee payroll taxes and the employer match.
· Business related expenses are deductible against the revenues received.
· There are a plethora of different retirement vehicles that can be employed
· Health insurance premiums may be deductible without the 10% AGI reduction.
If your contractor status is challenged and it is determined that you should be an employee, the employer can be subject to fines and penalties as well as being responsible for all of the associated payroll taxes.
Source IRS Pub 1779
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