Employee or independent contractor workers have to be one or the other. Workers who should be classified as employees but are not may be losing out on workers' compensation, unemployment benefits, and, in many cases, group insurance (including life and health) and retirement benefits.
Many people are wrongly labeled as independent contractors when they are really employees. These mislabeled workers are found in every occupation. However, no matter how an employer labels you, it is wise to determine for yourself if you are what your employer says you are.
If you have an employer employee relationship, it doesn't matter whether you're called an employee, partner, independent contractor, or co-adventurer; you're still an employee for tax purposes.
Your employer must withhold income tax on your wages and must pay Social Security tax (FICA), as well as withhold your portion of FICA. Also, your employer is responsible for unemployment tax (FUTA). Each January your employer must give you a Form W-2, "Wage and Tax Statement," showing the amount of taxes withheld the previous year.
If your employer does not withhold and deposit these taxes because you are misclassified, you will not be covered by unemployment compensation or workers' compensation. And you may be hit with a big tax bill at filing time if you have not been credited with paying these taxes during the year through withholding.
In a nutshell, if the person who employs you sets your work hours, provides you with equipment, tells you what to do and how to do it, and can fire you, then chances are you are an employee, not an independent contractor.
It does not matter if the employer allows you freedom of action in your work. What counts is the fact that the employer has the legal right to control the method and result of your work.
At present, the guideline the Internal Revenue Service (IRS) uses to classify workers is a list of 20 factors regarding the nature of the working relationship. You are probably an employee if several of these factors apply to you (and you should evaluate them both in reference to the staffing service and in reference to the ultimate employer the staffing service sends you to):
- The employer or your supervisor tells you when, where, and how to work.
- The employer trains you to perform services in a particular manner.
- Your services are part of the business operations because they are important to the success of the business.
- Your services are rendered personally.
- The business hires, supervises, and pays workers.
- You have a continuing relationship with the business.
- The business sets your work hours.
- You are required to work or be available full-time.
- You work on the premises of the business, or on a route, or at a location designated by the business.
- You perform services in the order or sequence set by the business.
- You submit regular reports to the business.
- You are paid by the hour, week, or month.
- The business pays your travel and business expenses.
- The business provides your tools, materials, and other equipment.
- You have no significant investment in the business.
- You don't make a profit or suffer a loss from the business.
- You normally work for one business at a time.
- You don't offer your services to the general public.
- The business has the right to fire you.
- You have the right to quit without incurring liability.
Another important difference is that as an independent contractor, Janice must withhold her own taxes and provide her own benefits. If she were working for a professional staffing service as a temp, the service would find Janice work, withhold her taxes, and often provide her with holiday and health benefits. In order to be successful, independent contractors must have the ability to obtain customers on their own and to be paid for providing a product or service.
To add to this confusion, some companies use special contract workers for specific services. For example, a company may contract out services like landscaping, security, or janitorial services. For the purposes of this book, these types of contracted services and employees will not be addressed.
Many independent contractors consider their contract work to be a part-time job. The Bureau of Labor Statistics says most independent contractors are "more likely to be out of school and have a bachelor's degree." They usually work in professional and administrative areas and are "less likely to work in manufacturing, wholesale, or retail trade."
If someone has the right to control only the result of your work and not the way in which you get that result, then you are probably an independent contractor. For tax purposes, you may receive a Form 1099-MISC, "Miscellaneous Income," instead of a W-2 from the business hiring you as an independent contractor.
If you're still not sure whether you're an employee or an independent contractor, you can get Publication 937, "Employment Taxes and Information Returns," and Form SS-8, "Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding." Both are available free from the IRS by calling 1-800-TAX-FORM (1-800-829-3676).
You are responsible for paying your own income tax and self-employment tax. You may want to get Publication 533, "Self-Employment Tax," and Publication 505, "Tax Withholding and Estimated Tax." Both are available free from the IRS.
As an independent contractor, you may have your own employees or you may hire another independent contractor (subcontractor).
