How to know if you’re an employee or a contractor – and why it matters
A job is a job, right? If we’re talking taxes, not all job types are the same. Here’s why your “employment status” matters: If your employer says you’re an independent contractor (Form 1099-NEC income), but you think you’re an employee (Form W-2 income), you may be surprised by a large tax bill when you file your income tax return.
That’s because independent contractors have to pay their own income tax and self-employment taxes throughout the year, while employers withhold and cover parts of these taxes for employees.
Millions of workers are surprised every year when they get IRS Form 1099-NEC (before 2020 this was the 1099-MISC) and end up with a tax bill because they haven’t paid enough (or any) taxes on that income. Also, if you don’t pay estimated taxes during the year, you can get hit with an estimated tax penalty. Learn more about estimated tax payment exceptions.
So, it’s important for employers and employees to get the employment relationship right, because the consequences can be expensive. Many times, employers make the decision on a worker’s status. But, it’s a “facts and circumstances” test, and each person’s situation is different.
It’s important to be proactive and have a clear understanding of your status as an employee or independent contractor. Independent contractor misclassification is a common thing, but it can be avoided you simply need to know the rules.
Think you may be a contractor and want to know how that affects your taxes? Check out our Guide to Gig Worker Taxes.
How to figure out whether you’re an employee or independent contractor
You need to look at three factors. All of them basically boil down to whether you or the business that pays you has more control.
1. Who has the right to control your behavior at work?
The Internal Revenue Service (IRS) is more likely to consider you an employee if:
- The business owner gives you instructions on when and where to work, what tools to use and/or where to purchase supplies and services.
- Instructions from the business are highly detailed.
- Evaluation systems measure how you do the work, rather than just measuring the results.
- The business trains you on how to do the job. It’s even more likely you’re an employee if the training is ongoing and involves procedures and methods.
2. Who has financial control and runs the business aspects of your job?
The IRS is more likely to consider you an employee if:
- You don’t significantly invest in your work equipment.
- You don’t have many unreimbursed work expenses.
- You don’t have the opportunity for profit or loss.
- Your services aren’t available to the market.
- The business guarantees you a regular wage for hourly, weekly, or other periodic work, even if you also get a commission. Independent contractors often charge flat fees for a job.
3. What’s your employment relationship with the business?
The IRS is more likely to consider you an employee if:
- You have a written contract that states you’re an employee (but this alone can’t determine your status).
- You receive employee benefits, such as health insurance, a pension plan, or vacation or sick pay. Companies generally don’t grant these benefits to independent contractors.
- You and the company expect that the relationship will continue indefinitely, rather than for a specific project or period.
- You provide services that are a key activity of the business.
Some of the factors aren’t as clear cut as others. Some may point toward employee status, while others indicate you’re an independent contractor.
The IRS weighs worker status on a case-by-case basis. If you’re unsure about your situation or want a professional opinion, a tax pro can help.
What to do if you think you’re incorrectly classified
If your employer treated you as an independent contractor but you think you’re really an employee, here’s how to file your return:
- You still owe your share of employment taxes, which you should report on your federal tax return using Form 8919, Uncollected Social Security and Medicare Tax on Wage. This form allows you to calculate and report your share of taxes as if you were an employee.
- Next, contest your independent contractor status by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. On Form SS-8, you’ll provide the IRS with the facts to determine whether you’re a victim of employee misclassification.
If you’ve already filed your return without Form 8919, file an amended return (Form 1040X) with a Form 8919. After that, file Form SS-8.
Don’t submit Form SS-8 with your tax return, because it will delay processing. Instead, send the form to the address on the Form SS-8 Instructions.
What happens when you file Form SS-8
The IRS will let you know when it receives your Form SS-8 and will assign a technician to review the employer employee relationship. During its review, the IRS may request more information from you, and will ask your employer for the same information on your Form SS-8. In doing so, the IRS may share some or all the information on your Form SS-8 with your employer.
It can take at least six months to get a determination from the IRS. Once the IRS decides how to classify you, the IRS will send a letter to your employer and a copy to you letting you know about its decision.
If you disagree, you can identify facts from the original submission that you don’t think the IRS fully considered or provide new information and ask that the IRS reconsider the decision.
If the IRS decides you’re an employee, you won’t owe any more taxes after you filed Form 8919 with your return.
If you’re an independent contractor, you’ll owe self-employment taxes and unemployment insurance.
How to get expert help
Worker classification isn’t always clear-cut. If you’re not sure whether your status is correct, talk to a tax professional about your situation. Doing so will allow you to plan and/or avoid an unexpected tax bill.
Or, if you’re an independent contractor who was surprised by a tax bill, the IRS offers several options for people who can’t pay right away. Learn what to do next.
Get started with filing taxes online or with an H&R Block tax pro – we’re here for you.
Check out our Guide to Gig Worker Taxes.
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