Independent Contractor or Employee?

What’s your classification? The wrong classification has the potential to increase your tax liability. Have you been classified correctly?  How do you know?  This is an area that the IRS is slated to start focusing more on, scrutinizing this topic for future audits.

As an employee, your employer withholds and matches your Social Security and Medicare taxes.  The employer also withholds Federal Income Tax from your paychecks and remits it to the Internal Revenue Service for you.  If you are responsible for paying any expenses yourself and are not reimbursed by the employer, under the new tax law you are not able to deduct those expenses against your income on your tax return, as you have been able to in the past. 

As an independent contractor, you are responsible for paying all of your Social Security, Medicare taxes, and your Federal Income Tax.  This type of arrangement is a lot easier for the hiring company, and allows you more freedom in decisions on your career. You are able to deduct your out-of-pocket business expenses directly against your income, and can potentially reduce the amount of taxes owed.

In determining classification there are a few “easy” questions to ask:

·        Do you make your own schedule and hours?

·        Do you provide and pay for your own tools, supplies and materials to perform your job?

·        Do you perform your job for multiple customers or clients at multiple locations?

If you answer these questions with a firm “YES”, then you fit into the category of an independent contractor.

If the answer is “NO” or a mixture of “YES” and “NO”, you may fall into the category of employee.  If you are currently being paid as an independent contractor, but feel like you are treated as an employee by the person or company paying you, it would be a good idea to review more of the factors to make this determination.

It is not terribly difficult to determine classification, but there can be gray areas with the IRS. Hiring companies can have people classified as employees and independent contractors, doing the same or similar work, which can confuse the situation. Either employee or independent contractor, knowing how the IRS is going to see your position will determine if you have correctly been filing your tax return to minimize your tax liability.