Are you an independent contractor (IC) or an employee? This is often an easy question for many individuals, but, in some cases, you may not be sure.
If your employer doesn’t make your business relationship clear to you, federal and state government agencies, and case law provide guidelines or tests to help you figure out your status.
How to Determine Your Employment Status
Whether you are an IC or an employee is important information you need to know. Your status affects how you perform your work, how you receive compensation, and what (if any) benefits you receive. Other factors include who pays for or provides the supplies needed to accomplish the work, how long the job lasts and what types of taxes need to be paid.
When it comes to defining the difference between an independent contractor and an employee, the focus is often on the level of control the employer has over the work of the individual.
Independent Contractor Defined
Independent contractors or freelancers are self-employed, or in business for themselves. By running their own businesses, ICs create their own livelihood by providing services or goods to individuals or to companies of various sizes.
Independent contractors often work on a temporary or occasional basis when their services are needed. ICs receive payments in a number of ways, and the payment schedule varies widely. As an IC, the employer or payer controls the results of the work you do but has no control over how you do the work or “what will be done” to complete the work.
Employee Defined
An employee works directly for a company for a salary or wages. By working for an organization, you depend on it for your livelihood and a large portion of your income comes from this job.
Employees can work on a full-time or part-time basis. They receive a fixed sum on a regular schedule. As an employee, you have less independence. Your employer controls how you perform the duties of your job. The employer has the legal right to dictate “what will be done and how it will be done.”
Are You an Independent Contractor?
An independent contractor has a variety of jobs. They can be web designers, baby sitters, writers, photographers, gardeners, consultants, cleaners, or IT specialists. This may surprise you, but the IRS considers doctors, lawyers, dentists, accountants and other professionals who offer their services to the general public to be independent contractors. Even if you own your own business or practice, you are an IC.
There are questions to ask yourself to determine your true status. Sometimes employers misclassify your employment status. They may tell you that you’re an IC, but the guidelines or tests issued by government agencies may indicate that you are really an employee. This mistake can cause consequences for both parties such as a tax liability for the employer and a reduced income for you if it turns out that you’re an employee.
The following characteristics of an independent contractor can help you decide your status.
- Do you choose the hours that you work?
- Are you paid by the job?
- Do you supply the equipment (computer and software) or other materials or tools needed to complete the project?
- Does the employer expect you to provide the necessary equipment or tools?
- Is the work temporary, short-term or when needed?
- Do you work for other employers at the same time?
- Do you hire and pay your assistants?
- Do you pa your own business expenses?
- Can you suffer a financial loss from this work?
- Do you depend on one employer for the sole source of your income?
- Are you eligible for employee benefits such as health insurance, paid vacation days, sick days, paid holidays, and workers compensation?
- Do employment and labor laws apply to you?
Independent contractors are self-employed and so must pay their own Self-Employment and Medicare taxes. However, there are exceptions to this and each case is different.
If you are an independent contractor you might submit a proposal for the particular work needed, sign a written agreement detailing the work, and then submit an invoice once the work is completed. Many ICs are asked to fill out a W-9 form for the IRS. If you did more than $600 in work in one calendar year for one company as an IC, the employer will send you a Form 1099.
Are You an Employee?
As an employee, you have less control over your work life than that of an independent contractor. However, if you work on-site, you could still be an independent contractor. By answering the questions below, you are in a better position to understand your employment status.
- Is your work an integral part of the business?
- Do you get most or all of your income from your job?
- Do you on the company payroll and receive steady paychecks?
- Do you get employee benefits such as health insurance, a pension plan, paid vacation and sick days, and paid holidays?
- Do you have taxes withheld from your paychecks?
- Is your work ongoing and permanent?
- Do you suffer any financial loss from the job, besides the possibility of termination?
- Does the employer pay Social Security tax, Medicare tax, workers’ compensation and disability premiums, and state and federal unemployment tax for you?
In addition to tests to determine employment status, state agencies also have tests to determine your status “under workers’ compensation and unemployment insurance laws.”
As an employee, you probably went through a job application process with the Human Resources department, and once hired, you had to submit personal information such as date of birth, social security number, and citizenship status and fill out a Form W-4 for the IRS.
For working individuals, it’s essential that you know the type of business relationship you are in. Your employment status, whether independent contractor or employee, affects not only you but your employer as well. And government agencies, such as the IRS, also expect an accurate employment status determination.
