A crucial consideration for any US citizen who earns an income is whether they should be considered an employee or an independent contractor. The people who hire you will often want to classify you as an independent contractor. This allows them to save on employment taxes and severance payments, depending on the jurisdiction. However, often times they will treat you as an employee while calling you an independent contract.
For the worker, there are crucial differences between the classifications. The primary difference when it comes to tax time is Self-Employment Tax. Generally speaking, any US citizen who works for a US employer must pay into the US Social Security and Medicare systems. If you’re a US citizen and you’re treated as an independent contractor, you’re technically working for yourself and therefore subject to the Social Security Taxes, in the form of Self-Employment taxes.
However, if you’re a US citizen and you’re employed by a foreign employer, you will generally not be liable for Social Security Taxes. There are exceptions, but this is the general rule.
The IRS provides some guidance to determine whether you’re an employee or independent contractor. They use what they call the “right-to-control test” to determine if someone is an independent contractor or an employee. The more control a company exercises over how, when, where and by whom work is performed, the more likely that person is an employee rather than an independent contractor.
The IRS uses three categories of evidence to decide whether a worker is an employee or independent contractor: behavioral control, financial control and the relationship between the parties. These factors are based on a common law twenty factor test. Analyzing these twenty factors will help determine whether you should file your taxes as an employee or an independent contractor. Employee or independent contractor status is determined by a number of factors, but no single factor is decisive. The individual circumstances of each case determine how much weight IRS gives to each factor. The twenty factors are listed below.
- Level of instruction. When a company gives employees clear instructions about when, where, and how to perform their jobs, it may indicate an employment relationship.
- Amount of training. Requiring employees to take training courses that are provided by the company may suggest that an employment relationship exists.
- Degree of business integration. If you are an integral part of your employer’s business, you are likely to be considered an employee.
- Extent of personal services. A company that insists on a particular person performing the work is asserting control over that worker, suggesting that they may be an employee rather than an independent contractor.
- Control of assistants. If a company hires and pays a worker’s assistants, the company may be legally required to treat that person as an employee rather than an independent contractor. If the worker retains such control over hiring and paying assistants, however, it suggests that an employment relationship does not exist.
- Continuity of relationship. A company that hires a worker to perform services on an ongoing basis may have an employment relationship with that person. However, an independent contractor arrangement can involve an ongoing relationship for multiple projects.
- Flexibility of schedule. People who are required to work at certain times and under certain conditions are usually considered employees.
- Demands for full-time work. Full-time work gives a company control over most of a person’s time, which supports the conclusion that there is an employment relationship.
- Need for on-site services. Requiring an employee to work on company premises may indicate that the worker is an employee.
- Sequence of work. If a company requires that its employees perform tasks in a specific order or sequence, this suggests that the workers are not in business for themselves as independent contractors.
- Requirements for reports. If you regularly have to write or speak about the progress of a project, this may indicate that you are an employee.
- Method of payment. Employees are usually paid on an hourly, weekly or monthly basis. Commission and project completion payments are more characteristic of independent contractors.
- Payment of business or travel expenses. Independent contractors typically pay their own travel and business expenses, so when a company reimburses such costs, it could be a sign that the worker is really an employee.
- Provision of tools and materials. Employees are more likely to be considered employees if they use company-provided equipment, tools, and materials. Independent contractors are more likely to be considered independent contractors if they use independently obtained supplies or tools.
- Investment in facilities. Independent contractors typically pay for their own equipment, supplies, and office space. In contrast, most employees rely on their employer to provide tools and other equipment as well as office space.
- Realization of profit or loss. If you receive a predetermined salary and have little opportunity to earn more, chances are you are an employee.
- Work for multiple companies. If you provide services for several unrelated companies, you may be considered an independent contractor.
- Availability to public. If a worker regularly provides services to the public, this is evidence that the worker is an independent contractor.
- Control over discharge. A company’s right to fire a worker suggests an employment relationship. By contrast, a company’s ability to terminate independent contractor relationships depends on contract terms.
- Right of termination. Employees generally can quit their jobs without liability, but independent contractors usually will be liable if they quit before finishing a job.
Do you think you qualify as an employee or an independent contractor after reviewing these factors? If you’d like to discuss your situation in greater detail, you can contact our office to make an appointment.
USE AT YOUR OWN RISK. The material and information contained on this website is for general information purposes only. You should not reply upon the material or information presented above as a basis for making any business, legal, or other decision. Consult a qualified tax or legal professional before making any such decision.