Deciphering whether a worker is an employee or an independent consultant may appear to require a roll of dice. Rules around what makes a worker an employee versus an independent contractor aren’t always as clear as black and white. However, guidelines are available to help wipe away confusion about the two worker types, clarity that may help you steer clear of Internal Revenue Service (IRS) probes.
Federal and state income tax generally must be withheld from employees’ paychecks. Depending on the laws in the jurisdiction your creative business operates in, you might also be required to withhold local income taxes from employees’ paychecks. Check with your local revenue or taxation department to confirm the types and percentages of taxes you’re required to withhold.
You also must generally take Social Security and Medicare taxes out of employees’ paychecks. Deductions like worker’s compensation tax and unemployment insurance tax are paid solely by you, the employer. At the end of the year, file W-2 forms with the IRS for employees that worked for you during the year; also provide employees with a copy of their W-2 so they can file it with their income tax returns.
Independent Contractors Meet Certain Criteria
Akin to employees, independent contractors generally complete a W-9 form when they start working for you. Unlike employees, independent contractors receive 1099 forms at the start of the year. They use these forms to file their income tax returns. As a creative business leader, you’re also required to file a 1099 with the IRS for each independent contractor you pay $600 or more to during the year. Generally workers are considered independent contractors if they meet the below criteria:
- They own their own business and provide services to your firm through their business
- As a creative business leader you do not control how a worker completes job assignments
- You don’t tell the workers when to start and finish working each day
- The workers may provide services to several clients
- You don’t provide benefits for the worker (e.g. healthcare insurance, paid vacation days)
By getting clear on the rules around what constitutes employees and independent contractors, also referred to as self-employed workers, you can avoid overpaying or underpaying on payroll taxes at local, state and federal levels. You can also steer clear of lawsuits files by employees and independent contractors who feel they’re being improperly classified and therefore, not receiving benefits and privileges they deserve.
Get into Spiral online at: https://www.ebookit.com/books/0000000841/Spiral.html
Check out Long Walk Up online at: https://www.ebookit.com/books/0000000531/Long-Walk-Up.html
Sources:
http://www.sba.gov/content/independent-contractors-vs-employees (Small Business Administration: Independent Contractors vs. Employees)
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html (Internal Revenue Service: Independent Contractor (Self-Employed) or Employee?
