Are You an Employee in the Workplace?
Many workers are unsure of their classification in the workplace. Often, people think they are employees when they are actually independent contractors and vice versa.
Four Alden and Associates has put together resources for employees, independent contractors, and a simple checklist for you to review to ensure your rights as an independent contractor are protected.
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Which are you?
For federal tax purposes, this is an important distinction. Worker classification affects how you pay your federal income tax, social security and Medicare taxes and how you file your tax return. Classification affects your eligibility for unemployment, social security and Medicare benefits as well as your tax responsibilities. If you aren’t sure of your work status, you should find out NOW.
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. Carefully review the following definitions.
These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. 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: 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, etc.
Training – if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.
If you receive less extensive instructions about what should be done, but not how it should be done, you maybe and independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
These facts show whether there is a right to direct or control the business part of the work. For example:
- Significant Investment-if you have a significant investment in your work, you 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 you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your un-reimbursed business expenses are high.
- Opportunity for Profit or Loss-if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
These are facts that illustrate how the business and the worker perceive their relationship. For example:
- Employee Benefits-if you receive benefits, such as insurance, pension, or paid leave, leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either and an employee or an independent contractor.
- Written Contracts-a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
- 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 un-reimbursed 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.
- 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 (Self-Employment Contributions Act – SECA). 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.
- You may deduct business expenses on Schedule C of your income tax return.
20 Basic Questions for Independent Contractors
Workers who are required to report to others are ordinarily employees.
Employers exercise control over training workers.
Control of employees by the owners determine the success or continuation of a business.
Employers control both the means and the results of the work.
Employers should control hiring, supervising, and paying assistants.
Continuing relationships between workers and employers indicate that employer-employee relationship exist.
The establishment of set hours of work by employers indicates control.
If workers must devote full time to employers businesses, employers have control over workers time. Independent contractors are free to work when and for whom they chose.
Control is indicated if the work is preformed on employers premises.
Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the employers
Control is indicated if workers must submit regular oral or written reports to employers.
Employees are paid by employers by hour, week or month where independent contractors are paid by the job.
Employers paying workers expenses shows that employer-employee relationship usually exists.
If employers furnish these employer-employee relationship usually exists.
Workers are independent contractors if they invest in facilities that are not typically maintained by employees, employees depend on employers for such facilities.
Workers who can realize profit or losses they are independent contractors, workers who cannot are generally employees.
If workers perform services for a number of unrelated persons at the same time, they are usually independent contractors.
Workers are usually independent contractors if they make their services available to the general public on a regular basis.
The right of employers to discharge workers indicates that the workers are employees.
Workers are employees if they have the right to end their relationships with their principals at any time without incurring liability.