To discover the specific differences between an employee and an independent contractor, we must follow the official determination or definition of the Internal Revenue Service (IRS). Surely there are other definitions of contractor versus employee, but what is more important than what the employee or contractor’s tax status is?
Employee tax status
The IRS has carefully created detailed descriptions on their website for employers to use in determining the tax status of everyone who works for or with the company. The official determination of a federal tax status is based on the type of business relationship a company’s management has with each worker or service provider.
There is a distinct difference for each one. A worker who is performing service may be labeled with one of four categories, based on their work relationship:
Self-employed independent contractors are people who do work for another and have complete control over what work is done and how it is performed. The person paying the contractor normally does not control the hours of work or even how the work is completed. Their only control over the contractor is the specifications and description of work. An independent contractor is considered self-employed and thus required to complete and pay their own taxes. However, the contractor is normally required to complete and furnish the employer with an IRS Form W-9 (which must be maintained for four years). The employer who has paid the contractor is responsible for providing an IRS Form 1099-MISC at the end of the tax year when incomes of more than $600 were paid.
Any professional who offers his or her services to the public, such as carpenters, doctors, lawyers, dentists, accountants and freelancers of all types, are generally classified as independent contractors.
Employee (common-law employee)
Common law determines that someone is an employee if their employer directly controls not only what is to be done with their work, but exactly how it will be performed and the hours the employee will work. It does not matter if the employee is free to do the job however they please, they are still qualified as employees so long as the employer has the right to control work. Even as a salesperson who receives a commission for direct sales, if the employee determines your schedule, or prescribes a number of hours you must work, or you must report to a manager, you are an employee.
Certain independent contractors can be considered statutory employees if they meet particular Medicare and Social Security requirements and are performing one of the following types of work: food delivery driver paid on commission, full-time life insurance salesperson for a single company, a homeworker who receives and processes work, or a full-time traveling salesperson.
Three types of workers qualify as statutory non-employees. The types of jobs that fit this category are direct sales of a company’s products or services; licensed real estate agents; or companion sitters who are independent of a service company.
Selecting the correct employee category
No one wants to provide incorrect information to the IRS, opening themselves up for an audit. It is of utmost importance not only to comply but to make sure you minimize any unnecessary liabilities.
Almost every business in the United States must not only deal with the withholding of federal income tax for full-time employees but must also withhold from their workers’ pay to submit Medicare and Social Security taxes.
These requirements are not required for non-employee status workers. That is why it is so important to understand the difference.
If you or someone you love was terminated wrongfully, because of some type of discrimination or harassment you can contact the Equal Employment Opportunity Commission (EEOC) regardless of your employment status. Of course, your tax status classification may have a good deal to do with what type of settlement is possible. Therefore, it is important to trust the professionals in this area of employment law to represent you to get just compensation in case you were wronged.
Legal help is available
If you believe you were not classified accurately by your employer, you should file an IRS Form 8919 to claim your possible share of any uncollected Medicare and Social Security taxes. You may be responsible for paying these taxes.
Other sources of assistance
There is an optional program you can use to get reclassified as a regular worker. Employers also have access to this program, so they can voluntarily reclassify their workers correctly. If an employer can show a real basis for treating a worker as a non-employee, the IRS will agree and do a reclassification of the worker.
It is called the Voluntary Classification Settlement Program (VCSP). The new classifications take effect at the start of the next tax period. All that remains is the necessary IRS paperwork and tax payments.
What Is at Stake?
If you wrongfully classified any or all your workers as non-employees without a reasonable basis, you may be liable to pay Social Security, Medicare, and Income taxes plus any penalty the IRS or a court may order depending on if you willfully tried to sidestep regulations to pay fewer taxes.