Employee or Independent Contractor?

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Who Am I? An Employee or Independent Contractor?

We sometimes face this question from our clients-Should I take W-2 or 1099? The question underling  this question is that should I be taxed as an employee or independent contractor? Another way to ask the same question is, should I be responsible for the payroll taxes or should we divide the payroll tax burden with my employer?

Well, let me clarify this way-there are certain tests to find that out. And if you qualify as an employee, then that is what you are. No matter what is convenient for you or the company who is hiring you.

There are two determining factors:

  1. Degree of Control
  2. Independence

Let’s understand these in context of three Common Law Rules:

  1. Behavioral:

Who decides the work pattern, work ethics, work planning, delegation etc?

  1. Financial:

Who provides tools? Who decides the pay scale of team members? Who provides for the overhead expenses?

  1. Type of Relationship?

Are there written contracts who can shape the nature of the relationship? E.g. Insurance, Vacation, Holiday and Sick Pays, 401k etc.

All the above factors are subjective, and no magic way of deciding and label an Employee or Independent Contractor. 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.

Also Read: Employee hiring process and Payroll Taxes

Some employers avoid the payroll cycle by treating individuals as independent contractors. If you incorrectly treat an employee as an independent contractor, you may be subject to penalties. It is advisable to contact a CPA or Attorney to cover your basis.

We at Tejal Dhruve CPA LLC offer full-service payroll, and we can take care of all your tax calculation and payment.

Contact us today to take advantage of our “Claim Financial Sanity This Summer” offer of One Hour Complimentary Session for Insurance, Taxes, Financial Planning for your family.

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