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Employee or Independent Contractor?
We’ve all heard of independent contractors, and most of us have been hired as an employee, however, what classifies a worker as one but not the other? This important question must be addressed by business owners upon new additions to their team.
Employees live in a world of limitations: they work in the constraints of their employer, who in turn determine their hours and monitor what skills and equipment are used. A person who works full-time is entitled to employment benefits such as healthcare and 401-K compensation. New hires are required to complete a Form W-4 (Employee Withholding Allowance Certificate), which dictates their tax withholding. Employees can use a tax calculator to prevent having too much or too little Federal income tax withheld from their pay.
In contrast to regular employees, an independent contractor performs a role with fewer restrictions. Because they’re essentially self-employed, they are allowed more flexibility in their schedules and can perform more at their own-pace. They are defined by common law principles of The Fair Labor Standard Act, which focuses on the level of control an employer has over a service or product. There is either a verbal or written contract of their services; many times this will not include permanent employment. Independent contractors oftentimes do not rely on their business as the sole source of income.
Due to the somewhat disconnected nature of this form of labor, independent contractors are ineligible for employer-provided benefits. In terms of tax forms and preparations, the employer is not required to compile a W-2 or report payroll for these workers. What an independent contractor must then do, is save the tax money that gets automatically taken out of an employee’s paycheck. From there, you will need to fill out a Form W-9 (for a taxpayer identification number), as well as Form 1099-MISC (miscellaneous income form) and prepare to file quarterly.
Even with these distinctions, sometimes the area between an employee and an independent contractor is still murky. In these instances, Form SS-8 will help determine the difference between the two. The assistance of a tax preparer will greatly facilitate the process and limit the likelihood of a tax misfiling. For businesses and individuals to file taxes correctly, the appropriate classification of employment must be known.
Guest contributor Andrea Fisher is an online marketer and content specialist from North Carolina. She is a published journalist with an English degree and political science minor from the University of North Carolina at Greensboro.
© 2011, Bruce Mc. All rights reserved.
