Am I an Employee or an Independent Contractor? The Definitive Guide

 

The question of employee classification has come up a lot in the past few years. With the rise of the gig economy and more and more folks choosing to branch off and work for themselves, independent contractors are on the rise—and companies are jumping on the bandwagon to reap the cost-saving benefits.

But here’s the thing. While being an independent contractor can be a freeing, empowering experience if that’s what you want, if you’re misclassified as one when you should be considered an employee, you’re missing out on the stability and benefits you deserve.

And, either way, knowing where you fall matters a lot when it comes to filing your taxes. Specifically, if you’re an employee, then the company you’re working for is responsible for withholding taxes throughout the year, as well as costs like the employer’s share of Social Security (FICA), Medicare, and unemployment taxes; if you’re an independent contractor, you’ll need to be paying quarterly taxes and will be fully responsible for those additional tax costs.

So let’s dig into how the IRS defines the difference. Unfortunately, it’s not as easy as just looking at how many hours you work for a company or something black and white like that. In fact, it’s a major gray area that looks at multiple factors related to the nature of your relationship and who has more control in the situation. (Basically, who wears the pants?) Some situations may be very clear, while others may not have a definitive answer without asking the IRS directly.

So yes, I lied a little in the headline of this post. But hopefully, the questions below will give you a clearer picture of the factors involved in determining your relationship with the people you work for.

How Much Do They Control How and When You Do Your Work?

First, the IRS looks at how much the company you work for has control over your behavior. Do they tell you exactly when and how to do your job, or just tell you the job that needs to be done and leave you to it?

You’re more likely to be considered an employee if: The company you work for provides extensive training, tells you specifically how they want you to do your job, stipulates the hours you must work, and/or requires you to work from a specific location.

You’re more likely to be considered an independent contractor if: The company you work for simply tells you the job that needs to be done and maybe a due date, but it’s up to you exactly what hours you work and how you tackle the task at hand. In this situation, only the result of your work should be under their control.

How Much Do They Control Your Money?

The next factor has to do with how much control the company has over your financial well-being. Are they providing your primary source of income, or are they just a piece in your money-making puzzle?

You’re more likely to be considered an employee if: You’re guaranteed a regular wage from the company, they prohibit you from working for other companies (or require you to work enough hours that it would be challenging to do so), and/or they provide you other financial benefits (like providing you the tools to do your job or reimbursing you for expenses).

You’re more likely to be considered an independent contractor if: You’re being paid a flat fee per project, are paid only after you invoice the company (vs. being paid a regular paycheck), are able to work for many different clients at once, and/or you provide your own tools, don’t receive reimbursements for general expenses, and otherwise have put “significant investment” into your own business.

How Serious is the Relationship?

The last factor is perhaps the most nebulous of all and has to do with how serious the relationship is. How permanent is your work together, how core to the work of the business is the work you’re doing, and are you getting any additional benefits?

You’re more likely to be considered an employee if: You’re hired for an indefinite period of time for something that is mission-critical to business operations (e.g., run the register at a local boutique) and/or receive employee benefits like paid leave or health insurance.

You’re more likely to be considered an independent contractor if: You’re hired on a project basis for something more ancillary to the work of the business (e.g., write blog articles for a local boutique) and/or don’t receive additional benefits.

Unfortunately, this isn’t as easy as a BuzzFeed quiz—there’s no clean number that if you answered yes or no to, you’ll get your answer. If you’re in a situation where you don’t feel like you clearly fall on one side or the other, I’d recommend consulting with an accountant for input, or if you want to get super official, asking the IRS using Form SS-8. This will not be a quick option but may be the only way to truly get a definitive answer.

The California Supreme Court has recently adopted a new legal standard for determining whether a company is an employer or is utilizing freelance contractors. Thankfully, the state of California can assist with the determination of employment work status using this form. For assistance in completing this form, contact your local Employment Tax Office of the Employment Development Department (EDD) or call the Taxpayer Assistance Center at 1-888-745-3886.

Abridged by Amy

  • Determining whether you’re an employee or independent contractor has a lot to do with who has more control in the relationship: control over how you do your job, how you make your money, and how serious your relationship with the company is.
  • Employee classification can be a bit of a gray area—if you’re unsure how you should be classified, consult with a CPA.

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Amy Northard, CPA

The Accountant for Creatives
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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