Employee classification is important because it determines whether an employer should withhold income taxes and pay Taxes on Social Security, Medicare, and unemployment on wages paid to an employee. Businesses generally do not have to withhold or pay taxes on payments to independent contractors. The income of a person who works as an independent contractor is subject to self-employment tax. In determining whether the person providing the service is an independent worker or contractor, account shall be taken of any information demonstrating the degree of control and independence. You are not an independent contractor if you provide services that can be controlled by an employer (what is done and how is it done). This also applies if you are granted freedom of action. It is important that the employer has the right to control the details of the provision of services. For federal labour tax purposes, the usual common law rules apply to determine whether an employee is an independent contractor or an employee. According to customary law, you need to check the relationship between the employee and the company. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories: behavioral control, financial control, and the relationship between the parties.
If there is an employer-employee relationship (regardless of the name of the relationship), you are not an independent contractor and your income is generally not subject to self-employment tax. Employees who believe they have been wrongly classified as independent contractors by an employer can use Medicare Form 8919, Unpaid Social Security and Payroll Tax PDF to determine and report the employee`s share of unpaid Social Security and Medicare taxes due on their compensation. The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying an employee as an employee or independent contractor. For federal labour tax purposes, a company must investigate the relationship between it and the employee. The IRS Small Business and Self-Employed Tax Center on the IRS website provides useful resources. For more information on how to determine if you are an independent contractor or an employee, see the section on independent contractors or employees. Typically, you`ll need to withhold income taxes, withhold and pay Taxes on Social Security and Medicare, and pay unemployment tax on wages paid to an employee. You usually don`t have to withhold or pay taxes on payments to independent contractors. If you have determined that the person you are paying is an independent contractor, the first step is for the contractor to complete Form W-9, Application for Tax Identification and Certification Number. This form can be used to request the correct name and tax identification number (TAXPAYER IDENTIFICATION NUMBER, TIN) of the employee. The W-9 should be kept on file for four years so that it can serve as a reference in case of questions from the employee or the IRS in the future.
If you paid $600 or more to someone who is not your employee, by . B a subcontractor, lawyer or accountant, for services provided during the year, a Form 1099-NEC must be completed and a copy of 1099-NEC must be provided to the independent contractor no later than January 31 of the year following payment. You will also need to send a copy of this form to the IRS by January 31. If you classify an employee as an independent contractor and do not have a reasonable basis to do so, you may be liable for tax on that employee`s payroll (the relief provisions described below do not apply). For more information, see Section 3509 of the Internal Revenue Code. Classifying an employee as an independent contractor without a reasonable basis for doing so makes employers liable for payroll tax. Some employers who can provide a reasonable basis for not treating an employee as an employee may have the option of avoiding paying payroll taxes. See 1976 PDF Publication, Section 530, Employment Tax Relief Requirements for more information. The general rule is that a person is an independent contractor if the payer has the right to control or direct only the result of the work, not what is done and how it is done. Small businesses should consider all evidence of the degree of control and independence in the employer-employee relationship. Whether an employee is an independent contractor or an employee depends on the facts in each situation. Also note that independent contractors have their own employees or may hire other independent contractors (subcontractors).
In both cases, they should be aware of their tax responsibilities, including their reporting and reporting obligations, for those workers. If you are an independent contractor, you are self-employed. To find out about your tax obligations, visit the Self-Employed Tax Centre. The IRS encourages all businesses and business owners to be aware of the rules when it comes to classifying an employee as an employee or independent contractor. Persons such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers who operate in a business, business or independent profession in which they offer their services to the public are generally independent contractors. However, whether these individuals are independent contractors or employees depends on the facts. The general rule is that a person is an independent contractor if the payer has the right to control or direct only the result of the work and not what is done and how it is done. The income of a person working as an independent contractor is subject to self-employment tax. It is important for business owners to properly determine whether the people providing the services are employees or independent contractors. One of the most common mistakes companies make is not having the right status for an employee.
The choice is made for an employee or an independent contractor. The IRS Small Business and Self-Employed Tax Center provides a variety of resources for small businesses as well as independent independent contractors. In the past, a “20-factor test” was used to assess workers to determine whether they were CIs or employees. These factors have been grouped into three general categories for the IRS`s examination of the specific situation: Companies must weigh all of these factors when determining whether an employee is an employee or an independent contractor. Some factors may indicate that the employee is an employee, while other factors indicate that the employee is an independent contractor. There is no “magic” or fixed number of factors that “make” the worker an employee or independent contractor, and not a single factor is alone in this provision. In addition, the relevant factors in one situation may not be relevant in another situation. If, after reviewing all three categories of evidence, it is still unclear whether an employee is an employee or an independent contractor, Form SS-8, The Determination of Federal Labour Tax Status, and the WITHHOLDING of Income Tax PDF can be filed with the IRS. The form can be submitted either by the company or by the employee.
The IRS will review the facts and circumstances and formally determine the employee`s status. The facts that prove the degree of control and independence fall into three categories: Here are two important points that small business owners should keep in mind when classifying workers: If you look at the following factors, you should know that the IRS does not take into account a specific factor, but one factor may be enough to cause the IRS to determine that a worker is an employee. There is no “magic number” of factors that determine status. In addition, the Voluntary Classification Settlement Program (VSP) offers certain eligible businesses the opportunity to reclassify their employees as employees with partial federal labour tax relief. .