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Tax issues and benefits of being an independent contractor vs an employee

Posted 08-25-2011 at 11:50 PM by TiffanyL

The advancement of jobs throughout the economic recovery has been, at the best, anemic. Many companies are choosing to hire independent contractors to fill gaps in their jobs. If ignored, incorrectly classifying yourself could have huge tax consequences. For both employees and employers, the differences are a hugely significant thing to understand. Source of article: Making the distinction; employee versus independent contractor

Employee compared to. Independent contractor

For individuals, the differences in working as an employee and working as an independent contractor mostly involve paperwork and personal responsibility. Whenever you are an employee, the employer is responsible for paying part of your payroll taxes. Work hours is your own choice in case you are an independent contractor but an employer chooses your hours and is responsible to get you whatever you need to get the job done. A contractor pays their taxes on their own and decides when to work and pays for the supplies they have to work. Independent contractors are generally paid more for their work however are responsible for paying out more also.

Independent contractor compared to. employee Internal Revenue Service style

The Internal Revenue Service distinguishes between the two kinds of works in determining taxes. 3 questions are the determining factors regarding independent work according to the Internal Revenue Service:

Behavioral: Does the company control or have the right to control what the worker does and just how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these contain things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, trip pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

These are the 3 things that are taking into consideration when the IRS determines status of employment, although there is not a formula.

The Internal Revenue Service decision making processes

The two types of employment can be confusing to businesses and even to individual workers. If the Internal Revenue Service determines that an individual was wrongly classified, back taxes could be charged to a business. According to section 503, if some things are met, a business can still be an independent contractor. Specific criteria must be met. Taxes must be paid on time and in the full amount in case you are an independent contractor so savings of these taxes is very essential. If you think you may be misclassified it is very important to correct it as soon as possible.




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