What if you think you're an employee but your employer doesn't withhold taxes from your pay because they say you're an independent contractor?
What happens if you had a job and are suddenly converted to independent contractor status?
What if you subcontract work to others in your business? Are they employees?
These are all good questions that deserve good answers. Employers have a financial incentive to designate you as an independent contractor rather than an employee because:
- They don't have to provide benefits to independent contractors that they provide to their employees.
- They don't have to pay Social Security (FICA) taxes on your behalf or make contributions to a pension fund for you.
- They don't have to pay other taxes for you, including state and local disability and unemployment taxes.
Tax Treatment Varies
If you are an independent contractor, you will be required to pay both halves of your SE (Social Security) tax obligation. As an employee, your employer pays half and you pay half. You'll generally have to file Schedule SE and pay SE taxes on your earnings as an independent contractor if your net (after taxes) earnings exceed $400 in one tax year.
If your earnings from a single employer exceed $600 in a tax year, the employer is required to report your earnings to the IRS (with a copy to you) via Form 1099-MISC. Otherwise, employee earnings (those who are not independent contractors) receive a W-2 statement. Not receiving a 1099 doesn't relieve you of reporting your income and paying taxes. You'll need to report ALL earnings from ALL employers (even those who paid you less than $600 over the course of a year and who are not required to give you a 1099.
As an independent contractor, you'll use Schedule C or Schedule C-EZ (if you qualify) to report your total earnings from all employers as well as your deductible expenses.
Determining Your Employment Status
The place to start if you're not sure if you're an employee or an independent contractor is the IRS. Its publication, Independent Contractor(Self-Employed) or Employee? will help you understand what the IRS looks for when making a determination of your employment status.
Factors the IRS Considers
The IRS says it examines 3 critical factors when determining if an individual is an independent contractor or an employee:
- Behavioral: Relates to the extent that the company controls or has the right to control what the worker dow and how it gets done.
- Financial: Here they try to determine if the business aspects of the job are controlled by the party making payments, including how the worker gets paid, whether expenses are reimbursed and who provides tools to get the job done.
- Relationship: Whether there are written contracts between the company and the work or whether the company is paying for benefits to the worker, including vacation pay, health insurance, etc. Also, how permanent is this relationship, and is the work performed a key aspect in the company's doing business?
How to Get an Employment Status Ruling from the IRS
Either the company OR the worker may request a determination of employment status directly from the IRS. You'll need to file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS advises that it can take 6 months or so to get a ruling from them, but you are not relieved from filing your tax return in the meantime.
What to Do if You Were an Employee But No Taxes Were Withheld
If, after reading the IRS guidelines for self-employed or employee you believe you were in fact an employee but not taxes were withheld from your pay, you'll want to file Form 8919 - Uncollected Social Security and Medicare Tax on Wages and Form SS-8 with your return. The qualifying events that allow you to file Form 8919 include that you have completed Form SS-8, and have either received or not received a determination on your status from the IRS.
What Happens if You've Already Filed Your Taxes?
If you've already filed your taxes thinking you were an employee but were an independent contractor (or vise versa) you may need to file an amended return - Form 1040X once you receive the IRS' ruling on your employment status.
Where to Get More Help
Fortunately, the IRS' website - www.irs.gov has a wealth of information on this and other tax topics. Additionally, all of the forms mentioned are available as electronic PDF files so you can access them online, fill them out on your computer and then print them or save them to file with your return. If you still have questions you should consult a qualified tax advisor for more information and assistance.