In today’s world of gig work and side hustles, many people find that freelance work or independent contracting affords the right balance of flexibility and income. But depending on what a company is asking you to do, you might actually be classified as an employee by the IRS. Here’s what’s different between the two work statuses, and why having the right classification for tax purposes is important.
What’s the difference between an independent contractor and an employee for taxes?
When it comes to federal income taxes, the IRS treats employees and independent contractors very differently.
When you are an employee, your employer must withhold income tax, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on your wages. At tax time, your employer will send you an IRS Form W-2 Wage and Tax Statement, where you can see how much income you earned and how much was withheld for state and federal taxes.
If you’re an independent contractor, your employer (or client) does not have to withhold or pay any taxes for Social Security, Medicare, or unemployment on your behalf. Instead, you are responsible for paying self-employment tax, and it’s recommended that you pay this tax liability in four installments called quarterly estimated taxes. When it’s time to file your taxes, you should receive a Form 1099 from anyone who paid you $600 or more for work.
How to tell if you are an employee or a contractor
The IRS says: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
To determine your employment status, consider the working relationship as a whole. Ask yourself who controls what and to what degree:
- Who decides how and when the work is done?
- Who determines what tools or equipment (computer, phone, materials, etc.) are used to do the work?
- Are you reimbursed for work-related expenses?
In other words, if your employer has a lot of rules about how, when, and where work is done, you’re likely an employee. If you are performing a service and calling most of the shots, you’re probably a contractor. See examples of self-employed jobs and job titles.
What if I was misclassified as an independent contractor?
If you think you should be classified as an employee rather than an independent contractor based on the criteria above, discuss the details of your work contract/arrangement with your employer, and communicate the issue as well as any other concerns you may have.
The IRS can help you correctly classify your worker status if you need help doing so. You or your employer should file a Form SS-8, and the IRS will make the final determination.
If it turns out your employer incorrectly classified you as an independent contractor, they could be responsible for paying employment taxes on your behalf. In that case, you can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to calculate and report your share of Social Security and Medicare taxes.
I’m a remote employee. Should I be classified as an independent contractor?
You may find that your remote work arrangement comes with added flexibility — for instance, you might be able to set different work hours or do your job from different locations. But these factors alone are not enough to change your work status from employee to contractor. Just because you are not working regularly in an office doesn’t mean that you should be considered an independent contractor.
Are you working remotely from a different state than your employer? If so, this could affect the amount of state taxes you owe. Learn more about filing state taxes as a remote employee or contractor.
This article is up to date for tax year 2021 (taxes filed in 2022).