Contractors and employees have several concrete differences that can benefit a business in a variety of ways. However, these differences are also contributing factors to how individuals can file their tax returns. The IRS and many states have adopted common law principles to define an independent contractor. The main difference is the method of payment for an employee and independent contractor. Employees receive their payments on a regular basis and contractors receive their payments on a case-by-case basis. Here are some other ways to differentiate contractors and employees:
- If the worker supplies his or her own equipment, materials and tools
- If all necessary materials are not supplied by the employer
- If the worker can be discharged at anytime and can choose whether or not to come to work without fear of losing employment
- If the worker control the hours of employment thus indicating they are acting as an independent contractor
- Whether the work is temporary or permanent
The employer must withhold income tax and apportion a given amount for Social Security and Medicare taxes for an employee. After each year, the employer gives an employee a W-2 which shows the total amount of taxes taken out of his/her paycheck for the year. If he/she itemizes their deductions and they total more than 2% of their adjusted gross income, he/she can put unreimbursed business expenses down on Schedule A of their income tax return.
For an independent contractor, the employer must giver him/her the IRS Form 1099-MISC to report his/her earnings. The employer does not have to withhold taxes from the paycheck, however, taxes still must be paid when filing the income tax return. Contractors can deduct business expenses on Schedule C of their 1040s.
According to Forbes.com, there are some advantages to which employers pay independent contractors:
From an employer’s viewpoint, paying independent contractors offers the benefits of:
- No income tax withholding;
- No employment taxes;
- No liability for acts of employees—like driving a car on company business;
- No federal and state discrimination laws covering only employees; and
- No fringe benefit, pension, retirement, or other plans.
Many worker status cases look primarily at:
- The employer’s degree of control over the worker;
- The worker’s opportunity for profit or loss;
- The worker’s investment in facilities;
- How long-term the relationship is; and
- The worker’s skill set.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.