However, your income as an employee may be subject to FICA (Social Security and Medicare Tax) and income tax withholding. The IRS encourages all businesses and business owners to be aware of the rules when it comes to classifying an employee as an employee or independent contractor. Caution: A purchase order may be held liable for labor taxes plus interest and penalties if an employee is incorrectly classified as an independent contractor. For more information about reporting requirements for payments to independent contractors, see Payment from independent contractors. Whether an employee is an independent contractor or an employee depends on the relationship between the employee and the company. In general, there are three categories to consider: Employee classification is important because it determines whether an employer should withhold income taxes and pay taxes on Social Security, Medicare, and unemployment on wages paid to an employee. Businesses generally do not have to withhold or pay taxes on payments to independent contractors. The income of a person who works as an independent contractor is subject to self-employment tax. If, after reviewing all three categories of evidence, it is still unclear whether an employee is an employee or an independent contractor, Form SS-8, The Determination of Federal Labour Tax Status, and the WITHHOLDING of Income Tax PDF can be filed with the IRS. The form can be submitted either by the company or by the employee.

The IRS will review the facts and circumstances and formally determine the employee`s status. The IRS Small Business and Self-Employed Tax Center provides a variety of resources for small businesses as well as independent independent contractors. The general rule is that a person is an independent contractor if the payer has the right to control or direct only the result of the work, not what is done and how it is done. Small businesses should consider all evidence of the degree of control and independence in the employer-employee relationship. Whether an employee is an independent contractor or an employee depends on the facts in each situation. Employees who believe that an employer has incorrectly classified them as independent contractors can use Form 8919 to determine and report the employee`s share of uncollected Social Security and Medicare taxes due on their compensation. The Voluntary Classification Settlement Program (CSIP) is an optional program that provides taxpayers with the opportunity to reclassify their employees as employees for future tax periods for labour tax purposes, partially exempting eligible taxpayers who agree to prospectively treat their employees (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply for the VCSP by completing Form 8952, Voluntary Classification Claim, and enter into a final agreement with the IRS.

Persons such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers who operate in a business, business or independent profession in which they offer their services to the public are generally independent contractors. However, whether these individuals are independent contractors or employees depends on the facts. The general rule is that a person is an independent contractor if the payer has the right to control or direct only the result of the work and not what is done and how it is done. The income of a person working as an independent contractor is subject to self-employment tax. The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying an employee as an employee or independent contractor. For federal labour tax purposes, a company must investigate the relationship between it and the employee. The IRS Small Business and Self-Employed Tax Center on the IRS website provides useful resources. In determining whether the person providing the service is an independent worker or contractor, account shall be taken of any information demonstrating the degree of control and independence. Incorrect classification of employees as independent contractors negatively affects employees because the employer`s share of taxes is not paid and the employee`s share is not retained. If a company misclassifies an employee without reasonable grounds, it could be held liable for the payroll tax of that employee. In general, an employer must withhold and pay income taxes, taxes on social security and health insurance, as well as taxes on unemployment. Workers who believe they have been mistakenly classified as independent contractors can use IRS Form 8919, unpaid payroll taxes, and Medicare to determine and report their share of uncollected Social Security and Medicare taxes owed on their compensation.

Behavioral control: An employee is an employee if the company has the right to direct and control the work performed by the employee, even if that right is not exercised. The categories of behavioral control are as follows: If you have a reasonable basis for not treating an employee as an employee, you may be exempt from paying labor taxes for that employee. To obtain this relief, you must file all required federal information statements on a basis consistent with your employee`s salary. You (or your predecessor) must not have treated an employee who held a position substantially similar to that of an employee for periods beginning after 1977. See 1976, Section 530 Employment Tax Relief Requirements PDF for more information. For more information on how to determine if you are an independent contractor or an employee, see the section on independent contractors or employees. You are not an independent contractor if you provide services that can be controlled by an employer (what is done and how is it done). This also applies if you are granted freedom of action. It is important that the employer has the right to control the details of the provision of services.

Classifying an employee as an independent contractor without a reasonable basis for doing so makes employers liable for payroll tax. Some employers who can provide a reasonable basis for not treating an employee as an employee may have the option of avoiding paying payroll taxes. See 1976 PDF Publication, Section 530, Employment Tax Relief Requirements for more information. If there is an employer-employee relationship (regardless of the name of the relationship), you are not an independent contractor and your income is generally not subject to self-employment tax. An employee is generally considered to be anyone who provides services if the company can control what is done and how it is done. It is important to note that the company has the right to control the details of the provision of the employee`s services. Independent entrepreneurs are generally persons engaged in an independent trade, business or profession where they offer their services to the public. Physicians, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers are usually independent contractors. Companies must weigh all of these factors to determine whether an employee is an employee or an independent contractor. Some factors may indicate that the employee is an employee, while other factors indicate that the employee is an independent contractor. There is no “magic” or fixed number of factors that “make” the worker an employee or independent contractor, and not a single factor is alone in this provision.

In addition, factors that are relevant in one situation may not be relevant in another situation. .