Compared to Independent Contractors, Employees

Compared to Independent Contractors, Employees

On an employee’s wages, a business must withhold income, medicare, and social security taxes. In addition, the company is liable for the employee’s employer share of social security taxes as well as federal and state unemployment taxes. On the other hand, independent contractors are responsible for paying their own portion of the employees’ and employers’ social security taxes.

An independent contractor is exempt from paying unemployment taxes for a business. The majority of businesses would rather treat an employee as an independent contractor. They are, however, not always permitted to do so. Any employee who, in common law, has the status of an employee is generally referred to as an “employee.”

A worker is considered an employee under common law if the person providing the service has the authority to direct and control the worker. When it comes to what and how work is done, an employee needs to be subject to the employer’s will and control.

The list of factors that are used to determine a worker’s status was compiled over time by the Social Security Administration and the Internal Revenue Service. Basically, there are three types of evidence: 1. 2. behavioral regulation Control over the finances Relationship between the parties Behavioral control evidence demonstrates a worker’s right to direct or control the specifics and methods of providing required services. Instructions given to the worker, evaluation systems, and training are all factors.

Evidence of the economic aspects of the relationship between the parties constitutes financial control. The extent to which the worker invests in the facility or tools used in performing the services, the extent to which the worker makes his or her services available to others in the market, the manner in which the worker is compensated by the business, and the degree to which the worker is able to make a profit or a loss from the work are all factors.

Evidence that reflects each party’s internal controls constitutes the relationship between the parties. The parties’ written contracts, the worker’s entitlement to typical benefits as an employee, and the worker’s ongoing relationship with the business are all important considerations.

By submitting form SS-8, you can ask the IRS to determine whether a worker is an employee. Additionally, there is now a program for voluntary classification settlement. By lowering your company’s potential tax, penalty, and interest exposure in relation to independent contractors, this program may be beneficial.

For federal employment tax purposes, eligible taxpayers can voluntarily reclassify workers through the IRS Voluntary Classification Settlement Program. A taxpayer must meet certain requirements in order to be eligible for this program, such as treating workers consistently as non-employees and filing all required forms 1099 for the previous three years. We’d be happy to tell you more about whether a particular worker needs to be classified as an employee or an independent contractor.