TOPICS:
JUL 01, 2004 06:50 PM
JUL 01, 2004 07:00 PM
JUL 01, 2004 07:01 PM
JUL 01, 2004 07:24 PM
JUL 01, 2004 07:35 PM
LightbulbJack
Lansing, MI
December 2003
JUL 01, 2004 08:12 PM
JUL 01, 2004 08:14 PM
Employee or independent contractor for tax purposes?
Are you classifying the people performing services for your business as independent contractors for IRS tax purposes? Is it possible that they might really be employees for IRS tax purposes?
How these workers are classified for IRS tax purposes has major tax consequences because employees and independent contractors are treated differently for IRS tax purposes. Potential disasters await your business if the worker is classified for tax purposes improperly. Improper classification for tax purposes can cause problems that could financially destroy your business. Business owners must withhold income tax on employees' wages, and must pay Social Security tax (FICA) as well as withhold the employees' portion of the FICA. They also are responsible for unemployment tax (FUTA) and must provide the employee with a Form W-2, "Wage and Tax Statement," showing the amount of wages and tax withheld for the year.
Payments to an independent contractor that total $600 or more for the tax year must be reported by the business owner on Form 1099-MISC, "Miscellaneous Income," and filed with the IRS. A copy also must be given to the independent contractor.
The key factor which determines whether a worker is an independent contractor is who has the right to control the worker as to how work is accomplished?
Government entities, interested or damaged third parties, and perhaps the worker himself will often later challenge the classification as independent contractor for a variety of reasons. Enormous tax problems can result from improper classification for IRS tax purposes.
The IRS has developed twenty common law factors which are used on a case by case basis to determine whether a worker is an independent contractor or an employee for IRS tax purposes. Independent contractors do not have to satisfy all of the twenty common law factors. It is best to think of the factors as weights on a balance scale.
The twenty common law factors of a perfect independent contractor relationship are:
No Instructions. Independent contractors are not required to follow, nor are they furnished with, instructions to accomplish a job.
No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods to accomplish the work.
Others can be hired. Independent contractors are hired to provide a result and usually have the right to hire others to do the actual work.
Independent contractor's work not essential. A company's success or continuation should not depend on the service of outside independent contractors. An example violating this would be a law firm which called their lawyers independent contractors.
No time clock. Independent contractors set their own work hours.
No permanent relationship. Usually independent contractors don't have a continuing relationship with a hiring company. The relationship can be frequent, but it must be at irregular intervals, on call, or whenever work is available.
Independent contractors control their own workers. Independent contractors shouldn't hire, supervise, or pay assistants at the direction of the hiring company. If assistants are hired, it should be at the independent contractor's sole discretion.
Other jobs. Independent contractors should have enough time available to pursue other gainful work.
Location. Independent contractors control where they work. If they work on the premises of the hiring company, it is not under that company's direction or supervision.
Order of work. Independent contractors determine the order and sequence in which they will perform their work.
No interim reports. Independent contractors are hired for the final result only. They should not be asked for progress or interim reports.
No hourly pay. Independent contractors are paid by the job, not by time. Payment by the job can include periodic payments based on a percentage of job completed. Payment can be based on the number of hours needed to do the job times a fixed hourly rate. Payment method should be determined before the job commences.
Multiple Firms. Independent contractors often work for more than one firm at a time.
Business expenses. Independent contractors are generally responsible for their own business expenses.
Own tools. Independent contractors usually furnish their own tools. Some hiring firms have leased equipment to their independent contractors so that they could show the independent contractor had their own tools and an investment in their business. This strategy won't work if the lease is for a nominal amount or can be voided by the hiring firm at will. The lease must be equivalent to what an independent business person could have obtained in the open market.
Significant investment. Independent contractors should be able to perform their services without the hiring company's facilities (equipment, office furniture, machinery, etc.). The independent contractor's investment in his trade must be real, essential, and adequate.
Services available to the public. Independent contractors make their services available to the general public by one or more of the following:
1) having an office and assistants;
2) having business signs;
3) having a business license;
4) listing their services in a business directory; or
5) advertising their services.
Profit or Loss possibilities. Independent contractors should be able to make a profit or a loss. Employees can't suffer a loss. Five circumstances show that a profit or loss is possible:
1) the independent contractor hires, directs, and pays assistants;
2) the independent contractor has his own office, equipment, materials, or facilities;
3) the independent contractor has continuing and recurring liabilities;
4) the independent contractor has agreed to perform specific jobs for prices agreed upon in advance; and
5) the independent contractor's services affect his own business reputation.
Can't be fired. Independent contractors can't be fired so long as they produce a result which meets the contract specifications.
No compensation if the job isn't done. Independent contractors are responsible for the satisfactory completion of a job or they may be legally obligated to compensate the hiring firm for failure to complete.
There is also a federal "safe harbor" rule which can exempt certain workers from the twenty common law factors. To be exempt from the twenty common law factors, a hiring firm must:
have consistently treated the worker and similar workers as independent contractors;
have filed all the required forms; and
have had some reasonable basis for treating the worker as an independent contractor because there were similar rulings or court cases, or because it was an industry-wide practice or because prior tax auditors had never questioned the practices.
If a worker clearly is an independent contractor, a complete agreement to that effect is useful and recommended; however, any agreement, no matter how well drafted and explained to each party and signed, will not change the results if a person is held to be an employee under the facts and circumstances.
The laws surrounding the employee versus independent contractor issues are extremely complex and you should consult with a tax attorney on these issues.
Improperly classified employees can cause business owners to end up with hefty tax penalties for nonpayment of employment tax. Those who need help deciding if their workers are employees or independent contractors can fill out Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Tax and Income Tax Withholding. The IRS will tell them if their workers are employees or independent contractors.
Related tax information about employees and independent contractors
Tax Directory Topics:
Is my income as an independent contractor taxable?
General Tax Questions
IRS publications about employee or independent contractor:
For more information about employee or independent contractor, consult IRS Publication 15-A, Employer's Supplemental Tax Guide and IRS Publication 505, Tax Withholding and Estimated Tax. Also see IRS Publication 17, Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.
Customer Support
sorry!!
Flannery
Havertown, PA
March 2004
JUL 01, 2004 08:15 PM
JUL 01, 2004 08:16 PM
[Edited on Jul 01, 2004 by psychoholicagogo]
JUL 01, 2004 08:17 PM
JUL 01, 2004 08:24 PM
JUL 01, 2004 08:28 PM
JUL 01, 2004 08:43 PM
kosomot
Pompano Beach, FL
November 2003
JUL 01, 2004 08:45 PM
JUL 01, 2004 09:09 PM
JUL 01, 2004 09:13 PM
JUL 01, 2004 09:13 PM
JUL 01, 2004 09:14 PM
JUL 01, 2004 09:15 PM
JUL 01, 2004 09:16 PM
ctrlcat said:
a whole lotta words!
sorry!!
Heehee!
illstabyou
Brooklyn, NY
March 2004
JUL 01, 2004 06:21 PM