It's almost tax time and the tax forms for some of us are starting to come in. You've worked hard all year and you're getting excited to fire up one of the 100% FREE tax filing options and bam your employer hits you with a 1099 form and has decided to call you an independent contractor instead of an employee. Now what?
Contrary to popular belief among some business owners, neither the employer nor the employee get to decide whether a worker is an independent contractor or an employee for tax purposes. Often, employers will misclassify employees as independent contractors in order to save money on payroll taxes because they do not understand the law or are intentionally trying to evade these taxes. Unfortunately, when this happens, many employees are left in the lurch, being unexpectedly hit with a 15.3% payroll tax bill on top of their regular income taxes and losing out on other protections.
What determines if a worker is an employee or an independent contractor?
According to the IRS, there are three categories to consider in order to determine whether a worker is an employee or an independent contractor: Behavioral, Financial, and the Type of Relationship.
1. Behavioral
Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
For example, if the employee is directed when and where to perform their work, what tools or equipment to use, who to hire for assistance, where to purchase or use supplied and services, what order or sequence work should be performed in, or what individual should perform the work, it would likely be inappropriate to classify that person as an independent contractor.
2. Financial Control
Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
For example, an independent contractor should have a significant personal investment in the equipment being used for work and should have an opportunity for profit or loss. If a worker is using their employers machines, facilities, or supplies and doesn't bear the risk of losing money, they are an employee, not a contractor. Additionally, an employee is usually paid a regular wage or salary where an independent contractor will often (but not always) be paid a flat per-job fee.
3. Type of Relationship
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
For example, if a worker is receiving benefits such as health insurance, retirement plan contributions, paid time off, or other insurance contributions, it is unlikely (but not impossible) that they are an independent contractor. Additionally, if a worker is hired with the expectation that the relationship will continue indefinitely, that is generally considered evidence that the worker is an employee. Finally, if a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
What to do if you think you have been misclassified or aren't sure
-
If you believe you have been misclassified, or are not sure, the first step is to talk to your employer about your concerns and find out why you were classified the way that you were.
-
Next, if your employer is unresponsive or will not correctly classify you, you can actually ask the IRS to make a determination by filing a Form SS-8. This will prompt the IRS to review the facts and circumstances of the worker's relationship and officially determine the worker's status as an employee or a contractor.
-
Finally, file your tax return with IRS Form 8919 to figure and report your share of the uncollected Social Security and Medicare taxes due on your compensation if you were treated as an independent contractor instead of an employee. By filing this form, your Social Security and Medicare taxes will be credited to your Social Security record.
Additional Resources
United States Department of Labor - Wage and Hour Division
Internal Revenue Service - Independent Contractor or Employee?
Submitted January 16, 2019 at 01:25PM by Not_a_CPA http://bit.ly/2MgJmtz
