Are You an Independent Contractor or Employee?

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Dear WAHFAQ,

I recently started working with a company, and they told me that paying taxes is 100% my responsibility. They said I’m considered an “Independent Contractor.” I’m a bit confused as to what this actually means and what I have to do for taxes.

When you enter into the “random job” world, you may find that not only can you get traditional employee work, but you might also score a few “independent contractor” gigs as well. It’s important to know the difference when it comes to keeping track of your business.

The IRS website has three different Common Law Rules to help make the distinction:

“Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? (If so, the worker most likely is an “employee”)

Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) (If so, the worker most likely is an “employee”)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?” (If so, the worker most likely is an “employee”)

The nice thing about working for someone as an employee is that your life, in terms of taxes and responsibilities, is pretty straightforward. You go to work, you punch a clock, you get a paycheck that automatically calculates your taxes, and generally when you file your returns, you get some money back from the government.

Being an independent contractor means that not only are you the employee, who needs to do the day-to-day work of the business, but you are also considered to be the business OWNER, so you’re responsible for tax deductions, sales taxes, licensing, marketing, and keeping track of the logistics of things. It’s worth it, however, if you’re able to establish a good base of revenue to keep you from succumbing to the cubicle lifestyle.

If the company you’re working for classifies you as an Independent Contractor, essentially, that means you’re self-employed. You can deduct all of your expenses related to your business which will help offset your tax liability. Expenses may include your Internet service, the depreciation on your computer, any special software or tools you need to buy, any mileage for traveling you need to do, etc. Check with a reputable tax attorney (you can find assistance through your local SCORE office,) to make sure that you’re doing everything you can to be in compliance with the rules and regulations in your state. You may want to look into getting an EIN (a tax ID for your business) so you can separate your business income from the income you earn with your SSN. It may seem a bit overwhelming at first, but over time you’ll get used to the requirements.

Even though there is a little extra organization and paperwork required to be an Independent Contractor, it absolutely is worth it to have the freedom to work whenever and wherever you want!