Tax Tip: Independent Contractor (1099) versus Employee (W2)

This question seems to come up more often than not – Am I (should I be considered) an independent contractor  or an employee?  The answer to this question is critical for both the employee (who could lose benefits, such as the right to claim unemployment, and incur higher tax liability) and the employer (who could incur interest and penalties in the case of misclassification).

So how do you define an independent contractor?  And what do you do if you believe you have misclassified?  Let’s take this one step at a time…and start with the definition of an independent contractor, or at least how the IRS defines it.  The IRS uses three broad categories to determine IC status:  Behavior Control, Financial Control and Type of Relationship.

“Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.  Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.  The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.”

What do you do?  As with most things, the lines can get murky so if are unsure about your work status or think that you may have been misclassified,you can ask the IRS to make the determination by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).


Related: 
Employee vs. Independent Contractor – Ten Tips for Business Owners
Publication 1779 
Publication 15-A
Form SS-8

Publication 1976

Disclaimer:  This blog post/article is not meant as tax advice.  Please consult a tax professional regarding your specific situation.