Are You an Employee or Independent Contractor?

Posted on 07. Feb, 2006 by in Saving & Investing

As April 15th approaches and the W2s start arriving in the mail I thought it might be important for you to know if you were an employee or an independent contractor last year. Why? As an employee, your employer takes out the appropriate payroll and FICA taxes; however, as an independent contractor the company pays you the gross amount and it’s your responsibility to pay all those lovely taxes. It’s also important to realize when the company your working for tells you that you’re an independent contractor when you’re really not – because that spells big time federal tax problems for your employer.

In general, someone who performs services for you is your employee if you can control what will be done and how it will be done.Here are the three characteristics to look out for when determining your independent contractor status:

Behavioral Control – Facts that show whether the business has a right to direct and control. These include:

* Instructions – You are generally an independent contractor if you are told:

1. when, where, and how to work
2. what tools or equipment to use
3. what workers to hire or to assist with the work
4. where to purchase supplies and services
5. what work must be performed by a specified individual
6. what order or sequence to follow

* Training – an employee may be trained to perform services in a particular manner.

Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job include:

* The extent to which the worker has unreimbursed expenses
* The extent of the worker’s investment
* The extent to which the worker makes services available to the relevant market
* How the business pays the worker
* The extent to which the worker can realize a profit or loss

Type of Relationship – Facts that show the type of relationship include:

* Written contracts describing the relationship the parties intended to create
* Whether the worker is provided with employee-type benefits
* The permanency of the relationship
* How integral the services are to the principal activity

As you can see, determining your work status can be very confusing. As such, it’s important to ask your employer about your status, or consult your friendly neighborhood CPA.

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