Are You an Independent Contractor or Employee? Here’s How To Tell
Many professionals are surprised to find out that their “worker status” actually matters. If you work for a company as an independent contractor but thought you were being treated as an employee. You could end up with a shockingly large tax bill at the end of the year. The reason is that independent contractors are responsible for their own taxes. This is something that an employer withholds for and covers part of for actual employees. As a result, it’s critical to figure out if you are an employee or an independent contractor and whether your classification is appropriate for your situation. If you want to learn more about how to determine your status. Here are some points to examine.
Who Controls Your Behavior
How much of your work situation is controlled by the company? How much is in your hands plays a role in whether the Internal Revenue Service (IRS) views you as an employee. Usually, if the business can exert a substantial amount of control. This could include things such as dictating when and where you work, which tools you are allowed to use, and where you can buy services or supplies. You are more likely to be considered an employee.
Additionally, if the company gives you highly detailed instructions about how you can complete tasks. Or if they evaluate you based on more than just the results of your efforts, or provides you with a significant amount of training (especially if it’s ongoing). It’s more likely that you’re an employee.
Independent contractors aren’t subject to as many restrictions. They can make choices about when and where they work. As well as the tools they use and the products or services they acquire. Usually, the most rigid request from the company will be a due date for deliverables.
Certain financial situations don’t usually arise for employees. For example, they aren’t expected to pay for their own work equipment, like computers. Instead, the company supplies them. Otherwise, if a worker does have to make an investment. It is typically temporary. Employees can usually get their business-related expenses reimbursed.
Employees also don’t have to deal with profit or loss in most cases. Instead, they are commonly guaranteed a specific wage. For instance, an hourly pay rate, a salary, or a specific commission arrangement.
Independent contractors usually have many financial factors to contend with. These include investing in their own equipment and dealing with profit and loss. It is also more common that they will complete projects for a flat-fee instead of another pay arrangement.
The Relationship with the Company
The IRS may also examine your relationship with a business to determine if you’re an employee or not. Factors like having a written contract that says you are an employee. Also, having access to benefits usually given to employees (like retirement plans, medical coverage, or paid leave) make it more likely that you’re an employee. Additionally, whether it’s thought that the arrangement will last indefinitely. Instead of just for a project, or if your service is one of the company’s key or core business activities. These arrangements could lead the IRS to decide that you’re an employee.
However, some of these factors are a bit ambiguous. For example, even having a contract that labels you as an employee isn’t enough to achieve that classification alone. You may still be an independent contractor. But the IRS does take each piece into consideration and tries to decide based on what the full scenario looks like.
What to Do If You’ve Been Misclassified
If a company is treating you like an independent contractor. However, you believe that you’re an employee. There are steps you can take. For example, you could file Form SS-8 with the IRS. The form lets the agency know you’d like your situation formally reviewed.
Along the way, you may have to supply the IRS with additional information. It will also reach out to the company that you worked with. To include requesting details from them as well.
It can take a minimum of six months to get a decision back. If your case is complex. It’s best to assume that it will take longer than that.
Once a decision is levied. You and the company will receive a letter outlining the determination. You can request the IRS to reconsider, providing additional information you may feel is pertinent, if you think they are incorrect. But, if you agree, that’s the end of the classification process. At that point, you’ll know what kind of taxes you owe and where the company’s responsibilities lie, and can take additional action as appropriate.
Have you ever been misclassified as an independent contractor when you should have been an employee? Would you rather be an employee or an independent contractor? Share your thoughts in the comments below.
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