Are you an employee, self-employed or an independent contractor? Find out the difference.
The question of whether you are an employee or a self-employed independent contractor is very important and may not always be easy to answer. You should understand the category you fall under, since it’ll affect how you pay your taxes.
1099 – the Independent Contractor
You are an independent contractor if you have the right to direct and control the most important aspects of your activity. People such as contractors, subcontractors and auctioneers, who maintain an independent trade, business or profession in which they offer their services to the public, are generally independent contractors.
If you are an independent contractor, your income earned will be reported to you by the payer on a Form 1099-MISC, unless the payer pays you less than $600 in the calendar year. However, you must report all the income you earned during the year, even if your client does not issue a Form 1099-MISC for your services. The person you will be working for will require you to fill out a W9 so they can send you the 1099 and attach the income to your social security number. The IRS has repeatedly warned business, who pay contractors, that they should be getting the W9’s from anyone performing work for them that isn’t a corporation.
As an independent contractor you are self-employed and are generally required to attach a business return to the annual income tax return that you file and to pay estimated tax quarterly. Self-employed individuals generally have to pay self-employment tax (Social Security and Medicare tax) as well as income tax.
W2’s – the Employee
You are an employee and get a W2 if your payer has the right to direct and control your activity. The factors of control fall into three key categories:
•Financial control, and
•The relationship between you and your payer.
No one single fact determines worker classification, rather all of the facts and circumstances of a relationship weigh in the correct worker classification determination.
If you are an employee, you are required to report the wages you received during the calendar year on your personal income tax return because they are taxable income. Your employer is required to report wages paid to you during the year on a Form W-2. Your employer is also required to ask you to fill out a Form W-4 and you are required to return that form to your employer. Form W-4 directs your employer on how much tax to withhold from your pay.
If your worker status is unclear you or your payer can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS to help determine your status. Warning: The IRS developed Form 8919, Uncollected Social Security and Medicare Tax on Wages, to simplify the process for employees to report their share of uncollected Social Security and Medicare taxes due on their compensation when their employers have misclassified them as independent contractors. This means your employer will probably have to pay some back taxes on your behalf if it is decided that you should have been a W2 employee all along and not a 1099 contractor.
The whole contractor vs. employee topic has always been an issue with the IRS. The IRS would be happy if everyone was paid as an employee so that they can get their income tax, social security and medicare taxes consistently through the year from your employer. However, running a business can become complex and not all employers want to take on the responsibility of an employee especially if they are not sure how much work they can give them.
It would be great for you also to be an employee so that your employer pays half of the share of the social security/medicare tax. As a 1099 contractor, you pay the whole amount on your own. However, there are some advantages to being a 1099 contractor. You may be able to take some deductions against your income like vehicle usage, home office expense, cell phone usage etc…
Also, as a 1099 contractor, you can work for other people at the same time. Now, if this isn’t possible because you spend so much time working for that one person, then you need to see if you really should be paid as an employee instead. The IRS has a brochure called “Independent Contractor or Employee”. You can download it at http://www.irs.gov/pub/irs-pdf/p1779.pdf.
I hope I cleared up some of the 1099 questions for you. If you have any questions, feel free to email or call me. My contact information is at www.christaaiani.com.
Christa Aiani, Enrolled Agent
Christa Aiani, EA – Income Tax & Accounting
Remember, Enrolled agents (EAs) are America’s tax experts. They are the only federally-licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS. You can view my contact information at www.christaaiani.com.
IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.