Do You Know The Difference Between An Employee And An Independent Contractor?

Do You Know The Difference Between An Employee And An Independent Contractor?

It can get a little tricky sometimes in determining whether someone you consistently hire to perform services for your business is an employee or an independent contractor; not to mention keeping track of the difference in tax treatment between the two.

Have no fear, Paragon is here to break it down for you!

Employees are defined by the IRS as “anyone who performs services for you…if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”

This means that employees are subject to your business’ instructions about when, where, and how to do their job.

If you have control over the following, then the individual should be classified as your employee:

  • When and where to do the work
  • What tools or equipment are available
  • Who may be hired to assist with work
  • Where other supplies and services must be purchased
  • Who must perform individual tasks
  • What order or sequence to follow when completing work

As an employer, you’re required to withhold a portion of employee’s Social Security and Medicare taxes (FICA). In addition, the employee is responsible for matching the amount of employer withheld Social Security and Medicare taxes.

Here are the forms you need for your employees:

W4: When hired, an employee should fill out this form. This tells you the marital status, number of withholding allowances, and any additional amount to use when you deduct federal income tax from the employee’s pay.

W2: At the end of the year you’ll send this to your employees, which will summarize their annual total wages and taxes withheld.

An individual is classified as an independent contractor if you, as the business owner, have the right to control or direct only the result of the work- not what will be done and how it will be done.

Independent contractors are self-employed, and can seek out opportunities with multiple businesses. As a business owner, if you’re working with an independent contractor, you likely won’t have to invest in or provide the facilities or tools they need to provide their service. While some independent contractors are paid an hourly rate, most often they require a flat fee or charge you on a time/materials basis.

Since independent contractors are self-employed, you are not required to withhold any income or FICA taxes from their wages and you are not subject to the unemployment tax on their wages or fees. With proper documentation, you can deduct this non-employee compensation from your business income.

Here are the forms you need for independent contractors:

W9: your independent contractor should fill this out upon agreeing to perform services for you. This will give you their taxpayer ID and their address so you can send them a 1099-MISC form.

1099-MISC: like the W2, this is what you’ll send at the end of the year. This will summarize what you’ve paid them throughout the year, and qualifies you to deduct their compensation.

1096: An information return that is sent to the IRS that aggregates the payments made to your independent contractors throughout the tax year.

If you have further questions or concerns regarding employees or independent contractors, get in touch with Paragon Accountants today.