Every tax season, I hear this same story from different people. This is why I decided to write a cautionary story about it, so you won’t fall prey to it. When you are hired by an employer, most people assume they are being hired as an employee. However, that is not always the case. Employers sometimes hire a person as a contract laborer and don’t bother to tell them that small fact.
It is not until tax season, which is usually the next year, that the person finds out they are not an employee. They find this out because instead of receiving a Form W-2, they are receive a Form 1099-Misc. At this point, the person realizes that federal, state, social security, etc. have not been withheld throughout the year. Now, the person has to pay self-employment tax and other taxes.
When you are first hired as an employee, an employer has you fill-out a Form W-4. On the other hand, if you are hired as a contractor, independent contractor, or contract laborer, the employer should have you fill-out a Form W-9. Unfortunately, some employers don’t follow the rules and the hiree is left paying the bill at tax time.
The IRS has these three common law rules that determines if you are an employee:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include 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, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Be cautious when you are hired. Review the forms the employer provides you. Check you paystub to find out if taxes are being withheld. Ask your employer directly if you are being hired as an employee or a contractor. If you are being hired as a contractor, make sure you follow the IRS regulations.