You may think that a workers status as an employee or an independent contractor is based on what the company and worker decide, but that isn’t the case. At times, companies will classify a worker as an independent contractor even though they treat them as an employee, with the same standards and expectations a regular employee would be subject to, without any benefits to that relationship. This would be considered a misclassification of worker status.
Why does it matter how you are classified? As an independent contractor, you are generally able to negotiate higher pay than if you were a regular W-2 employee. Also, if you structure your business properly, you are actually able to pay less taxes than if you were an employee. It’s important that you protect your status, by following certain criteria, so you don’t run the risk of being reclassified by the IRS, potentially losing the benefits and perks associated with the IC worker status.
So how do you know if you are an employee or an independent contractor? The IRS uses three characteristics to determine the relationship between businesses and workers:
Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
Using those characteristics the IRS reviews various criteria that help determine your workers status. It is important to note that all the criteria does not have to be met, for you to be considered a 1099 or W-2, but rather, the arrangement must meet enough of the criteria that an evaluator of the IRS would be satisfied with your worker status.
If your worker status remains unclear after a review of this criteria, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filled with the IRS by either employer or worker. After Form SS-8 is filed, the IRS will officially determine your worker status.
If you are an independent contractor and want to learn how you can save taxes and reduce your tax burden just by implementing a few simple tax strategies, please contact us for a free tax consultation!