Are You a Contractor or Employee? Knowing the difference is very important
January 18th, 2020
Are you an independent contractor or an employee? As the pandemic continues, many long-time employees are now picking up jobs as contractors. In the meantime, states like California are trying to force the definition of employees upon companies. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.
As a contractor. If you are the worker and you are not considered an employee you must;
As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;
Determining the answer: things to consider
Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess your level of independence. Here are some tips.
Don't forget your obligations
With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3 percent of your income due for FICA (Social Security and Medicare), forgetting to pay this can quickly become a financial nightmare.
While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.
Michelle A. Friedman, CPA, PLLC.
MAF | 01/18/2021
At Michelle A. Friedman, CPA, PLLC, we've been serving the Tax and Accounting needs of Houston, TX and the surrounding area for years. If you need help managing any aspect of your personal or business finances, we want to hear from you.!