Worker classification affects how you pay your federal taxes and file your tax return. It also impacts your eligibility for certain benefits such as Social Security and Medicare. The IRS states: “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.” In a production and media environment the nature of the work can sometimes make this classification difficult to determine.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Employees may also be eligible for company benefits including participation in the health or retirement plan. In 2014 the Patient Protection and the Affordable Care Act will increase the importance of ensuring that a company properly classify its employees.
If you are an independent contractor you generally are considered self-employed and are subject to paying self-employment taxes as well as income tax. The self-employment taxes are the Social Security and Medicare tax primarily for individuals who work for themselves. Self-employed individuals are required to make quarterly estimated tax payments while employers typically deposit their withholdings and tax payments with the government within days of the end of the pay period. In today’s challenging economic times you can image which option the government prefers.
As mentioned above, determining the proper classification of a worker can sometimes be difficult. The IRS defines “Common Law Rules” that fall into three broad categories to assist in the classification process. They are Behavioral, Financial and Type of Relationship. Let’s look at an overview of each area.
3 Common Law Rule Categories:
1. Behavioral Control
If the employer has the right to direct and control the work this would indicate that the worker is an employee. If you hire an editor and provide the edit system to use, define when and where the editor should work and provide extensive instructions about how to edit the material, you probably have exhibited behavioral control.
2. Financial Control
Independent contractors typically have a significant investment in their work, are not reimbursed for some or all of their business expenses and have an opportunity to realize a profit or loss. A Videographer who owns her own gear and establishes her own rates for services are factors that indicate she is an independent contractor.
3. Type of Relationship
What is the intent of each party? If the company is providing benefits it would appear you are an employee. Written contracts between the parties can be extremely useful in documenting the relationship.
There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors, which are relevant in one situation, may not be relevant in another. The key is to consider all the above factors in your specific situation.
