Independent Contractor vs Employee: What the IRS Says

Are you really a freelancer or are you an employee? Here's what the IRS has to say, why you should care and a tool to help you figure it out.

Independent contractor vs employee
Are some of your freelance clients actually your employers?

There’s a growing amount of conversation about whether freelance roles are independent contractor vs employee positions.

Some state and local governments are exploring the issue and trying to slap together legislation to update their definitions and positions. California and its horrendous AB 5 law is an example.

Get Up To Speed: California’ Awful, New Freelance Law

But self-employment is nothing new for the IRS. And the IRS knows better than to try to draw stiff lines of what is and what isn’t freelance.

IRS Guidance on Self-Employment

As a general rule, “an individual is an independent contractor if the payer (i.e. the client) has the right to control only the result of the work and not what will be done or how it will be done.”

“You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action,” the IRS says.

To determine whether a role is an independent contractor vs employee position, weigh evidence about the degree of control and independence that’s involved, the IRS advises.

And it provides three factors to help you that.

  • Behavioral: Does the company have control over what you do? Does the company tell you how to do the work?
  • Financial: Does the company control the business aspects of the relationship? Does the company determine how you get paid? Is the company covering expenses for the work, or are you writing those costs off as freelance tax deductions? Do you get the necessary resources and tools for the job yourself, or does the company provide everything?
  • Type of Relationship: Is there a contract between you and the company? Has the company offered any employee-type benefits? Is the work you do a key aspect of the business?

The IRS offers guidance but leaves a lot of room for interpretation because there is no “magic” or set number of factors that “makes” a person an independent contractor versus an employee, its website says.

No one factor stands alone in making this determination. And, factors that relevant in one situation may not be relevant in another.

Whether a person is or isn’t an independent contractor or employee depends on the facts in each case.

Figuring Out Whether You’re An Independent Contractor vs. Employee

But what if you can’t figure it out?

You don’t have to take a company’s word. In fact, you shouldn’t.

There are a lot of freelance jobs that are deep in the gray water on this issue and some that cross the line.

And the IRS will help you work it out.

All you have to do is fill out Form SS-8: Determination of Worker Status For Purposes of Federal Employment Taxes and Income Tax Withholding and the let Uncle Sam make the call.

But be forewarned that the IRS says the result may take up to six months.

Although the IRS’ determination on your employment status may help, you’ll probably want to use local or state resources to determine if you’re classified correctly under those standards.


Why Governments Are Interested

You may be wondering why governments are getting more focused on who is and who isn’t self-employed.

The answer is MONEY, of course.

When you’re employed, the federal government collects income tax, Medicare and Social Security from the employer on your behalf.

If the employer misclassifies you as an independent contractor vs. employee, all of the government’s money comes directly to you, and Uncle Sam has to hope that you send him his share.

Likewise, state and local governments are starting to look at the revenue they’re losing when workers are misclassified. And imposing fines on misclassification offers an additional source of revenue.

But Why Should You Care

Whether a company classifies you correctly also affects your money.

As a freelancer, you’re responsible for paying all of your Social Security and Medicare taxes. If you qualify as an employee, you only have to pay half. The company pays the other half.

Furthermore, if you qualify as an employee, you may be entitled to certain rights and employment benefits.  And you don’t want to leave anything on the table that’s due to you.

What If You’re Actually An Employee?

If you’ve been operating as a freelancer but realize you should have been considered an employee, the IRS will help you with that too.

Fill out Form 8919, which will help you figure and report your share of uncollected Social Security and Medicare taxes and your Social Security earnings will be credited to your Social Security record.

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