Independent Contractor / Employee Status

Many companies hire independent contractors. Being absolved of the responsibility of withholding a worker’s state and federal taxes is one of the main motivators. With independent contractors, companies can just contract the person, get work done, and avoid all of the administrative headache of payroll liabilities.

Worker Audit

Due to payroll taxes, having “employees” is very expensive for businesses. Therefore, many a controversy has arisen over defining who and what is an “independent contractor” versus an “employee.” When a business sees you as one versus the other, there should be a solid differentiation in your relationship with that company or hiring entity.

Businesses will often define workers as independent contractors when, by function, they are actually an employees. Because of this, the IRS conducts audits of some companies to verify work staff claims — looking for payroll liability abuse.

What is an Independent Contractor?

If the way a worker functions is actually like an employee, that distinction needs to be declared; this directly affects a company’s claimable payroll deductions.

To be clear, “Independent Contractors” should have markedly different relationships with the companies they provide services to versus general employees. There should be no confusion, gray area, or blurred lines.

The Internal Revenue Service has no less than 15 criteria that distinguishes employees from independent contractors and expects your taxes to be paid accordingly. According to the IRS, independent contractors are workers who control their own schedule, purchase their own work supplies and tools, maintain multiple clients, and they personally manage how a project or service gets completed for the hiring entity. Independent contractors should be able to come and go as they please without fear of reprisal or firing.

Further, independent contractors are generally paid via separate payment methods and schedules than individuals compensated through a company’s payroll system. Misclassification of workers as independent contractors can trigger audits that revise a worker’s status over the last ten years, which can suddenly require commensurate payroll taxes to be due immediately.

Know Your Role

Being clear about your working status either way makes a world of difference when it comes to how your taxes get paid. Whether your work relationship with the company is permanent or temporary, if the previous descriptors for “independent contractor” define your relationship with a company, the company is your client and you are subject to self-employment taxes. If your relationship with a company is more controlled, tasks are dictatorial, the company provides all of your tools and materials, and/or pays you on their payroll schedule, that company is subject to Federal Income Tax, State Tax, Social Security, and Medicare withholding responsibilities.

Freedom is not so Free

Being self-employed has clear perks and freedoms. You have freedom to roam, to work when you want to, and freedom to complete your contracted work by whatever means you see fit. However, the arduous job of tax liability withholding now falls to you, the self-employed individual, instead of an employer. If one is not skilled in accounting admin — or properly aligned with a tax professional who is — huge tax liability problems could arise, and quickly.

Tax Debt Relief Now

If you’re an employer and are unclear if a worker should be declared “employee” or “independent contractor,” seek expert, tax law counsel for clarity now. Knowing a worker’s legal classification will help you avoid an expensive misunderstanding down the line. Equally, if you are self-employed and have recently found yourself in trouble with the IRS due to mishandled self-employment taxes, seek expert tax law counsel now. Don’t risk it. Resolve your personal tax debt issue as an independent contractor. When self-employed, a critical disruption in finances from a sudden bank levy can send your business into a tail-spin from which it may never recover.

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