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July 1, 2009

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Question: How do you determine if a person is an employee or an independent contractor?

IRS: The determination is complex, but is based on who has the right to control how, when, and where the person performs services. It is not based on how the person is paid, how often the person is paid, or whether the person works part-time or full-time.

There are three basic areas which determine employment status: behavioral control, financial control, and relationship of the parties.

For more information on employer-employee relationships, refer to Publication 15, Circular E, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally, you should report your non-employee compensation on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ, Net Profit From Business. You need to pay self-employment tax on your net earnings from self-employment on Form 1040, Schedule SE, Self-Employment Tax if you had net earnings from self-employment of $400 or more.

Generally, there is no tax withholding on this income. Thus, you may have been subject to the requirement to make quarterly estimated tax payments. If you did not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Employees pay into the Social Security and Medicare trust funds, as well as income tax withholding, through payroll deductions. 

The Editors at Small Business Tax News