Working for yourself, either full- or part-time, means that you are not working as someone else's employee. You are considered to be either a sole proprietor or an independent contractor. But how do you know if you are self-employed or if the check you receive should have taxes withheld?
If you are an independent contractor, you may perform services for someone who pays you for those services, but that person does not employ you. The IRS takes special care to examine relationships when there is some discrepancy over whether a person is an employee or an independent contractor.
To be considered an independent contractor, you must have the right to control the means and methods of how you perform your work. If the person or company for whom you work controls not only what you do but how you do it, the IRS is likely to say you are an employee rather than an independent contractor. If you are an employee in the eyes of the IRS, your employer is responsible for paying employment taxes such as Social Security and unemployment on your behalf.
To help determine whether you are an employee or an independent contractor, the IRS provides a list of 20 questions. The list below presents the IRS questions in terms that are easy to understand. The more questions that generate a "yes" answer, the more likely it is that you are an employee.
- Does your boss give you instructions that you have to obey?
- Does the company you work for provide you with training?
- Are your services integrated into the regular business operation of the place where you work?
- Is it a requirement that you, personally, provide the services?
- Are you prohibited from subcontracting the work?
- Is the business relationship an ongoing one?
- Does the person for whom you work set your hours?
- Are you required to work full time for one organization?
- Is your work performed at the premises of the person who pays you?
- Does your boss tell you in what order to perform your tasks?
- Must you submit reports (oral or written) summarizing your work progress?
- Do you receive payment at regular intervals such as weekly or monthly?
- Do you get reimbursed for business and travel expenses?
- Does the person you work for provide your tools and supplies?
- Do you have no significant investment in the tools required to perform your job?
- Is your work relationship such that you will never incur a loss from the services you provide?
- Are you prohibited from working for more than one company or person at a time?
- Are you prohibited from making your services available to the general public?
- Is it the company's responsibility of you don't meet the specifications of your contract?
- If you cause damage, is the company for which you work responsible?
In recent years, the IRS has placed the employee/independent contractor issue under greater scrutiny. There is a concern that companies are trying to reduce the amount of payroll taxes they have to pay by reclassifying employees as independent contractors, thus shifting the burden to the worker. In order to prove to the IRS that you are an independent contractor, make sure you take the following precautions:
- The company paying you issues you a 1099-MISC form at the end of the year, reporting both to you and the IRS how much compensation you received during the year.
- Anyone else who does work for the company in your capacity gets treated like an independent contractor, just like you.
- You have good reasons why you are an independent contractor instead of an employee. For example, you perform services for several clients rather than just one, or you subcontract some of your work to other people.