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09-18-2008, 07:22 AM

#11

LibertyTaxServ

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Joined APC: Sep 2008

Posts: 1

Independent Contractor or Employee

Below is a document outlining the differences between an Employee and an Independent Contractor.

If you need specific answers to your situation, please feel free to contact any of the 2,600 Liberty offices around the country.
Visit www.Libertytax.com to find the office nearest you.

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These relevant facts fall into three main categories: behavioral control; financial control; and relationship of the parties. In each case, it is very important to consider all the facts – no single fact provides the answer.

Behavioral Control
These facts show whether there is a right to direct or control how the individual does the work. An individual is an employee when the business has the right to direct and control the individual. 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:

Instructions – if the individual receives extensive instructions on how work is to be done this suggests that the individual is an employee. Instructions can cover a wide range of topics, for example:
· how, when, or where to do the work
· what tools or equipment to use
· what assistants to hire to help with the work
· where to purchase supplies and services

If the individual receives less extensive instructions about what should be done, but not how it should be done, the individual may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Training – if the business provides the individual with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that the individual may be an employee.

Financial Control
These facts show whether there is a right to direct or control the business part of the work. For example:

Significant Investment – if the individual has a significant investment in his/her work, they may be an independent contractor .While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.

Expenses – if the individual is not reimbursed for some or all business expenses, then the individual may be an independent contractor, especially if the individual’s unreimbursed business expenses are high.

Opportunity for Profit or Loss – if the individual can realize a profit or incur a loss, this suggests that they are in business for themselves and that they may be an independent contractor.

Relationship of the Parties
These are facts that illustrate how the business and the worker perceive their relationship. For example:

Employee Benefits – if the individual receives benefits, such as insurance, pension, or paid leave, this is an indication that they may be an employee. If they do not receive benefits, however, they could be either an employee or an independent contractor.

Written Contracts – a written contract may show what both the individual and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

Businesses and workers must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
Generally, whether a worker is an employee or an independent contractor depends upon how much control the business owner has. If they have the right to control or direct not only what is to be done but also how it is to be done then the workers are most likely employees. If they can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then the workers are probably independent contractors.
When You Are an Employee

Your employer must withhold income tax and your portion of social security and Medicare taxes. Also, your employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay.
You may deduct unreimbursed employee business expenses on Schedule A of your income tax return, but only if you itemize deductions and they total more than two percent of your adjusted gross income.

When You Are an Independent Contractor

The business may be required to give you Form 1099-MISC, Miscellaneous Income, to report what it has paid to you.
You are responsible for paying your own income tax and self-employment tax of 12.4% (Self-Employment Contributions Act – SECA) on your earnings. The business does not withhold taxes from your pay. You may need to make estimated tax payments during the year to cover your tax liabilities for both state and federal taxes. If the estimated payments are not sufficient to cover the tax liability, you may be subject to underpayment penalties on both the state and federal level.
You may deduct business expenses on Schedule C of your income tax return.