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43. Are You an Independent Contractor or an Employee?

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

An employee is generally considered to be anyone who

(a) performs services,

(b) the business can control what will be done, and

(c) how it will be done.

What matters are that the business has the right to control the details of how the worker's

services are performed.

Independent contractors are normally people in an independent trade, business, or profession in which they offer their services to the public. Some examples include doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers. However, based on the situation, they may be performing services as an employee if they work for one company, report to the business owner, and are provided with the tools needed to perform the work. normal another big key is whether they receive a regular paycheck regardless of the work performed or are paid by their clients based on a contractual understanding.

Whether a worker is an independent contractor or an employee depends on the relationship between the worker and the business. Generally, there are three categories to examine:

  • Behavioral Control - Does the company control or have the right to control what the worker does and how the worker does the job?

  • Financial Control - Does the business directly or control the financial and business aspects of the worker's job. Are the business aspects of the worker's job controlled by the payer? (Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.)

  • Relationship of the Parties - Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Misclassifying workers as independent contractors adversely affect employees because the employer's share of taxes is not paid, and the employee's share is not withheld. If a business misclassifies an employee without a reasonable basis, it could be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes (jointly considered FICA taxes), as well

as both federal and state unemployment taxes. Workers who believe they have been improperly classified as independent contractors can use IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected Social Security and Medicare taxes due on their compensation.


The Voluntary Classification Settlement Program (VCSP) is an optional program

that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a

class or group of workers) as employees. Taxpayers must meet certain eligibility

requirements, apply by filing Form 8952, Application for Voluntary Classification

Settlement Program, and enter into a closing agreement with the IRS.


Generally, someone is self-employed if any of the following apply to them.

  • They carry on a trade or business as a sole proprietor or an independent contractor.

  • They are otherwise in business for themself (including a part-time business).

Self-employed individuals generally are required to file an annual tax return

and pay estimated tax quarterly. They generally must pay self-employment

tax (Social Security and Medicare tax) as well as income tax. Self-employed

taxpayers may be able to claim the home office deduction if they use part of a

home for business.


The gig economy — also called sharing economy or access economy—is an activity

where people earn income by providing on-demand work, services, or goods. Gig economy income must be reported on a tax return, even if the income is from part-time, temporary, or side work; not reported on a Form 1099-K, 1099-NEC, W-2, or another income statement; or paid in any form.

Contact the office if you have performed services as an independent contractor

for a consultation on your tax filing requirements and if estimated tax payments will be due prior to filing your 2021 income tax return.


Tax Preparation, Payroll, Accounting, Tax Planning

Call us at (800) 913-0809 or send an SMS at (224) 676-3577 if you have any questions.

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