Employee or Contractor?

 

The Internal Revenue Service is very specific in defining an employee versus an independent contractor. If your employer provides a work environment, tools, or equipment, gives you specific guidelines on how to do the work and holds you accountable for the work, you are an employee. The employer must pay you a predetermined amount and withhold a portion of your income for state and federal income tax. They also must pay half of your social security and Medicare fees (FICA) and withhold your half from your paycheck.

 

Your employer must then pay the amount they withheld from your pay to the IRS and the appropriate state organizations. Additionally they may need to pay unemployment insurance, workman’s compensation insurance and other benefits such as health insurance or pay into a retirement fund.

 

If you are on your own to work when you want, using your own methods, and get paid when the job is completed or at certain points along the way, you are a contractor and are responsible for paying your own income tax, social security and Medicare, which is then called Self-Employment Tax, as well as providing your own health insurance and providing your own retirement plan.

 

Many employers attempt to avoid paying FICA and other benefits by considering employees to be contractors. This will lead to serious legal issues and should be avoided.

 

Employers report employee’s income, income tax and other pertinent information on a Form W2 annually.

 

If a contractor is paid more than $600 in any year and is not a corporation, the person or organization making the payment must report the amount on a Form 1099-Misc.

 

If you get a 1099-Misc showing “Nonemployee compensation” you are self-employed whether you intended to be or not.