If you want the IRS to determine if a specific individual is an independent contractor or an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. For information on eligibility for a voluntary program to reclassify your workers as employees with partial relief from federal employment taxes, see Voluntary Classification Settlement Program (VCSP) Frequently Asked Questions. For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee.
At one time, there were 20 factors provided by the IRS that had to be used in court decisions to decide worker status. It is often still used as a tool, but many of the factors Whats the Difference Between an Independent Contractor and an Employee are not relevant today. If you’re still not sure whether someone you are taking on would be classified as an independent contractor vs. employee, then don’t worry.
Independent contractors get no benefits.
There’s a lot to consider before you take someone new on in your business. You need to establish their role and responsibilities, prepare their work station and work out if they will need training, amongst other things (check out this hiring process checklist template for more info on this). He is a nationally recognized speaker on a variety of tax topics offered for continuing education for CPAs and financial planners and has authored several publications and articles. And an important side note here — make sure you are appropriately inquiring of your clients if they are involved in the gig economy before you prepare their returns, perhaps asking if they “occasionally” drive for Uber or Lyft. If the answer is yes, make sure that receipts and other documentation are available for support. The consequences can be grave when you intentionally misclassify a worker.
A good starting place could be to look at if the employment falls under one of the different types of employment contracts. For example, is it a full-time employment contract or a part-time contract? Does the contract fall squarely under an independent contractor agreement? Similarly, an employment https://quickbooks-payroll.org/ contract must accurately define the worker’s job expected to be performed by the employee, and the work is usually a key aspect of the business. However, there’s much more at stake in this relationship, possibly including benefits, other employee-related costs, and even a pension plan.
Independent Contractor vs. Employee Chart
The IRS uses an 11-factor test based largely on the ability of the company to direct and control the worker as they perform their duties. Making a choice between these two would be difficult as both have their pros and cons. However, if you learn the differences between employee and independent contractor, then the selection is quite easy.
- Independent contractors will provide consulting services to more than one business.
- Here, we’ll discuss the significant differences between employees and independent contractors and help you figure out exactly which work structure is right for your business.
- Twenty years ago, the use of independent contractors (or, freelancers) by established businesses was not that common.
- Employees are often afforded more opportunities than independent contractors, making them more expensive hires than contractors.
- Regardless of what’s in the employment contract, the IRS determines a worker’s status based on how the relationship is actually carried out.
His personal mission is to take a genuine interest in his clients, and serve as a primary resource to them. And I own The Walker Collective, a law firm that caters to the contractual, intellectual property, and business formation needs of creative entrepreneurs and small business owners. It could also include the payment of back taxes, Medicare and Social Security contributions, and other penalties for state and federal taxes.