Employee versus Independent Contractor

Many businesses hire workers for services as they grow and develop. However, in order to determine the pay and tax structure for these workers, the business must properly determine the worker’s status as either an employee or independent contractor. If a worker is misclassified as a contractor and the IRS determines that the worker is an employee, the employer will be assessed fines and penalties for failure to withhold taxes.

An independent contractor is treated as a self-employed individual and is responsible for all related income and employment taxes and remits estimated quarterly tax payments throughout the year at the federal and state level. This individual is issued a 1099 for income at the end of each year by the business for services provided $600 and more.

An employee, while responsible for all income and half employment taxes, does not remit taxes throughout the year. The employer is responsible for withholding and remitting all related income and employment taxes. The employee may also be eligible for employer-provided fringe benefits.

Categories to Determine Worker Classification

Behavioral Control

A worker is an employee if the business can control the means of the work performed. The type and degree of instruction and training provided by the business are considered.

Financial Control

Independent contractors are more likely to have the ability to make a loss/profit, have unreimbursed expenses, and provide services outside of their involvement in the company. For example, if the company restricts the contractor from providing services elsewhere, the worker is likely an employee.

Relationship

Some factors that play into the relationship aspect are written in contracts, usually for a certain period for contractors. Permanency of the business relationship can be a determining aspect.  Another key to consider is benefits. Usually these are provided to employees.

If you are looking for a CPA or have any questions about accounting services, please contact me, Catherine Roe, at catherine@cowartroecpa.com or 504-252-0652. I would love to work with you!