The question of whether you are an employee or a self-employed
independent contractor is very important and may not always be easy to
answer. You should understand the category you fall under, since it will
affect how you pay your taxes.
You are an employee if:
Your payer (the company you work for/with) has the right to direct and
control your activity. The factors of control fall into three key
categories:
*
Behavioral control
*
Financial control, and
*
The relationship between you and your payer.
No one single fact determines worker classification, rather all of the
facts and circumstances of a relationship weigh in the correct worker
classification determination.
If you are an employee, you are required to report the wages you
received during the calendar year on your personal income tax return
because they are taxable income. Your employer is required to report
wages paid to you during the year on a Form W-2. Your employer is also
required to ask you to fill out a Form W-4 and you are required to
return that form to your employer. Form W-4 directs your employer on how
much tax to withhold from your pay.
You are an independent contractor if:
*
You have the right to direct and control the most important
aspects of your activity.
People such as contractors, subcontractors and auctioneers, who maintain
an independent trade, business or profession in which they offer their
services to the public, are generally independent contractors.
If you are an independent contractor, your income earned will be
reported to you by the payer on a Form 1099-MISC, unless the payer pays
you less than $600 in the calendar year. _*However, you must report all
the income you earned during the year*_, even if your client does not
issue a Form 1099-MISC for your services.
As an independent contractor you are self-employed and are generally
required to attach a business return to the annual income tax return
that you file and to pay estimated tax quarterly. Self-employed
individuals generally have to pay self-employment tax (Social Security
and Medicare tax) as well as income tax.
