Tax Issues with Independent Contractors
The tax law covering independent contractors is not simple. There are numerous factors that impacts the way the IRS will view your case concerning independent contractor/employee relationship. As you know, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Word of Caution: If an employer incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
If You Are an Independent Contractor
The general rule is that the payer has the right to control or direct only the result of the work done by an independent contractor, but not the means and methods of accomplishing the result.
This broad rule has a lot of gray areas that are open to interpretation and there are numerous other factors the IRS will consider before coming to a determination. Finding the right classification involves detailed analysis of the relationship between the parties focusing on evidence of the degree of control and degree of independence, including behavioral and financial control.
If You Are an Employee
General rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.
In addition, certain workers, even if they fit the definition of an independent contractor, are considered employees (e.g., life insurance sales agent, delivery drivers of certain food products and certain home-based workers).
If you have any questions concerning your particular case, please do not hesitate to contact the Houston-based tax attorneys at Pro Tax Councel for a free consultation today.