Employee vs. Independent Contractor
If ever there was a misunderstood area of tax law it is the employee vs. independent contractor determination. Here is an overview of the area.
Employee vs. Independent Contractor
Businesses must know which sort of person they are dealing with who is performing the services for them. In fact, there are as many as four different classes for workers, including independent contractors, statutory employees, statutory non-employee, and a common-law employee. But in terms of knowing how to treat payments and taxes for the different forms of workers, it is the employees and the independent contractors which must be treated very differently.
An employee is a worker with whom you have a great deal of control over. In essence, a business should consider a worker an employee when the business has control over what will be done and how it will be done. Employees are subject to income tax, Social Security and Medical taxes, and unemployment taxes being withheld from their paychecks. Also, employees must be categorized as such by the business on their forms.
An independent contractor has a great deal more independence in relation to the business than an employee does. The business, with an independent contractor, only has the right to control the result of the work being done by the worker. The business basically says what they need, and the independent contractor is the person who discerns the how it will be done aspect. Independent contractors who are paid more than $600 in a year must be reported on a 1099-MISC form. They are filed as miscellaneous income.
Failure to classify a worker properly can result in heavy employment taxes and fees against the business. For this reason, it is very important for businesses to be conscious of the designation of people working for them and to think carefully about how they classify those workers. If you, as a business owner, get caught classifying employees as independent contractors, you are going to be fined by the IRS and liable to pay all past taxes attributable to the employee. This is going to represent a serious chunk of change if they have done a lot of work for you.
The employee vs. independent contractor determination is a tough one for businesses. You should focus on the control aspect in making your determination. If you have any doubts whatsoever, get a written opinion for your situation from an accountant.