Looking for a holiday job? Employee or contractor status makes a tax difference to you, your boss and the IRS
Last week's jobs report for October was surprisingly good. The unemployment rate fell to 5 percent, its lowest level since 2008 and half of the 10 percent rate in the wake of the financial crisis.
If predictions are correct for seasonal hires this year, even more workers could be having a merrier than usual Christmas.
But that holiday joy could be dashed at tax filing time if you don't pay attention to how you are classified by your temporary seasonal employer.
If you're hired as an employee, your boss takes care of withholding of not only income taxes, but also payroll taxes. These are the Federal Insurance Contributions Act (generally shown as FICA on pay stubs) amounts that cover Social Security and Medicare.
But if your boss carries you as an independent contractor instead of an employee, you must take care of paying estimated income and the self-employment taxes yourself. And if you don't do that per the Internal Revenue Service rules, you could face penalty charges in addition to any taxes due at filing time.
Wrongly designated, and possibly costly, workers: The IRS is well aware that sometimes companies misclassify workers.
Often, it's simply an error on an employer's part. Other times, a business might intentionally consider a worker who's really an employee as a contractor to avoid having to make matching FICA payments for the worker.
Either way, that why the tax agency is continually sending out notices to business about how to properly carry workers on their books. It's also why the IRS operates the Voluntary Classification Settlement Program (VCSP), which gives companies a chance to correctly reclassify their workers as employees for future tax periods for employment tax purposes. Participating VCSP businesses must pay 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for the most recent tax year, but won't owe any interest and penalties.
And companies that don't voluntarily correct their workers' status better be careful.
Caroline Ciraolo, acting assistant attorney general in the Department of Justice Tax Division, said that her office and the IRS are planning to increase their enforcement efforts, including seeking and monitoring civil injunctions requiring enforcement.
In a Nov. 6 speech to the annual meeting of the California Tax Bar and California Tax Policy Conference in La Jolla, California, and reported by Tax Notes, Ciraolo noted that the Justice Department is taking employment tax noncompliance "extremely seriously" and that it is "losing patience" with employers not paying the employment taxes.
To help employers and employees know the difference in the types of workers, the IRS has Publication 1779, Independent Contractor or Employee. You can check it out on your work breaks.
In the meantime, here are the three main categories the tax collector uses in determining whether a worker is an employee or a contractor.
Behavioral control: Are you or the company in charge of how you do the job? When the business has the right to direct and control the worker, then that person generally is considered an employee.
Say, for example, the company provides extensive instructions on how work is to be done. This generally indicates that you are an employee. Instructions can cover a wide range of things, such as how, when, or where to do the work; what tools or equipment to use; who can help you do the job; and where to purchase supplies and services you need to do the work.
Another employee indicator is training. When a company provides you with training about required procedures and methods, that means it wants the work one in a certain way and suggests that you are an employee.
Financial control: If you have a significant investment in your work, you may be an independent contractor. A typical contractor signal is that you are not reimbursed for expenses you incur to get the job done. But be careful here. You still could be a contractor and simply have any expenses counted as part of the fee you and the company agreed upon.
A better indicator of being a contractor instead of an employee is that you will realize a profit or incur a loss for the work you're doing. This suggests you are in business for yourself.
Relationship of the Parties: Here the IRS looks at how you and company are involved. If, for example, you receive benefits, such as insurance, pension, or paid leave, the tax agency sees this as a good indicator that you're an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
Note that no single factor is paramount in determining a worker's appropriate legal and tax status. In each case, you -- and your boss and the IRS -- must consider and weigh all the facts.
One thing that could help is a written contract. As noted earlier in discussing expense reimbursements, this document can help you, the company and the IRS get a clearer picture of the job you're doing and whether you're doing it as an employer or a self-employed contractor.
And that can help clear things up at tax time.
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