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Filing Taxes as an Employee vs. Independent Contractor

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.

Does it make more sense to file taxes as an employee or independent contractor? It's a question with some gray area and so for federal tax purposes, it is really important for business owners to make the correct interpretation for individuals who provide services for them.

The answer basically depends on who has “control” in the working relationship.  In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

  • Generally, a person is considered to be an employee if he or she performs services for an individual or a business and the individual or business controls what services are performed and how they are performed.
  • A general rule for being an independent contractor is that the payer has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

If an employer classifies an employee as an independent contractor and has no reasonable basis for doing so, the employer may be held liable for employment taxes for that worker. Generally, when you are an employee, you pay half of those taxes and your employer pays the other half but as an IC, you are repsonsible for paying all  your employment taxes. In fact, not a bad idea to throw in a reminder about quarterly estimated payments because if indeed a worker is an IC then it's a good idea to keep in mind quarterly payments to stay in compliance. Here is a link to more on that online here

Under the new Voluntary Classification Settlement Program (VCSP) and as part of the IRS’ Fresh Start initiative, eligible employers can obtain relief from federal payroll taxes they may have owed in the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that erroneously treat their works or class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees. More information no VCS programs can be found online.

Also, when employment status is in doubt or disputed, either the employer or worker may file Form SS-8 to request a determination of the status of a worker for purposes of federal employment taxes and income tax withholding.

The IRS offers a really comprehensive web page on this subject. It's also available in other languages such as Vietnamese, Spanish and Russian. 

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Christopher November 13, 2012 at 08:24 AM
It is important for employees to know what kind of status they are being conferred upon by their employers. They may be wrongfully called an independent contractor and made to pay all the taxes. If you are working for the same guy for a prolonged period of time and your boss dictates your service, most likely you are an employee. - http://www.deepcreekconstructionschool.com

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