Are You and Employee or a Contractor? - What You Don't Know Can Cost You

If you're working as a contractor with a company, one thing you have to do is make sure that you are classified correctly so that you don't get into tax trouble. There are two general kinds of workers, employees and independent contractors. The big difference between the two is how you get paid and who is responsible for paying your taxes.

Tax Issues for Employers and Contractors
Employers are responsible for paying certain state and federal income taxes for their employees. Independent contractors are responsible for paying for all of their taxes. If you think that you are an employee when in fact you are some kind of independent contractor, you may have unpaid taxes and that could get you in serious trouble with the IRS. You may owe the taxes plus penalties, and if you can't pay, it could lead to other problems you don't want to have.

Are You Really a Contractor or an Employee?
If you were hired as a contractor, you may really be an employee. To find out if you are an employee, look at how the company is treating you. To figure that out, look at how the company is controlling your behavior, how finances are handled, and your relationship with the company.

Behavior
You are probably an employee if the company controls:

* When and where to do the work
* What tools or equipment to use
* What workers to hire or to assist with the work
* Where to purchase supplies and services
* What work must be performed
* What procedures to follow when performing your work

Finances
You are probably an employee if the company:

* Buys or controls most or all of the equipment and resources
* Reimburses you for most or all of your expenses
* Guarantees you a regular wage
* Pays you when resources to do your work are not available
* Doesn't allow you offer or provide your services to others

Relationship
You are probably an employee (even if your contract says that you are an independent contractor) if the company:

* Has employee-type benefits like paid vacation and sick days
* Hires you for an indefinite period or on a permanent basis
* Can control or direct what you do for the company

IRS Classifications
The IRS classifies workers into several categories, and if you are not sure what class you are in, review the for basic IRS classifications below:

Employee
Independent Contractors
Statutory Employee
Statutory Nonemployee

What to Do if You have a Wrong Classification
If you thought that you were a contractor and realize that you are really an employee, you should discuss this with your company and straighten things out. If you no longer work for that company, you should take some steps to deal with your possible tax situation. If you visit the IRS web site, you can find some basic steps to take to make sure your former employer pays its share of your taxes. You should also talk with a tax professional to see if you will need their services.