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There is a difference between an independent contractor and an employee when it comes to classifying the two for tax purposes. Misjudging the distinction could cost the company money in fees and penalties. Below is a description of both so that an employer can avoid trouble due to mistakes.
An employee of a company is someone who is subject to the rules and regulations of the company. The job they perform is dictated by the company, which also directs how they do their job and when. Employees may work at home for an employer but they are still working for the company.
An independent contactor is also referred to as a freelance worker. This classification includes artists, actors, writers and others who perform on a per-job basis for a client. Independent contractors have the right to control how the work is done and what is done when they accept a contract from a business. The client only has a say in the look of the completed work.
Independent contractors work for themselves. Their trade or profession is their business. They are considered self-employed by the IRS and pay taxes according to that classification. Independent contractors receive a 1099-MISC form from each business they deal with showing the amount of money paid to them for their services.
Any business that engages employees is required to pay taxes for those employees. Social Security-, unemployment-, and Medicare taxes are paid by the employer for each employee. The company determines the amount of federal and state taxes withheld based on W-4 information provided by each employee. Employers also provide medical and disability insurance for them if they want it.
Independent contractors are not employees. They receive the full amount for their contracted services. Employers are not required to pay social security or Medicare taxes for them or provide any benefits. Their only cost is the expense of the work.
Mistakenly paying an independent contractor as an employee or an employee as an independent contractor can cause confusion. Independent contractors are responsible for paying their taxes based on their earnings for the year. Since they are both employee and employer, they are taxed at 15.3 percent for Social Security and Medicare. An employer only pays half of this amount and the employee pays the rest. Independent contractors may also owe state and federal taxes, as well.
Companies who classify telecommuting employees as independent contractors aren't paying their requisite portion of taxes owed to the government. When this mistake is discovered, employers are assessed for the full amount of the unpaid taxes as well as a penalty. Depending on how long it has been going on, the sum could be substantial. Therefore, consider the work of each person in your company carefully. Use the explanations above to determine whether they are independent contractors or employees.
