Independent contractor...employee..."getting 1099'ed"...self-employment tax...these terms and their implications, in a legal and a tax sense, are complicated. At the outset of a company/independent contractor or employer/employee relationship, a clear relationship needs to be defined. Unfortunately, many times the relationship is not made clear because neither party understands the difference between an "independent contractor" or an "employee."
Individuals designated as independent contractors are issued 1099 tax forms by companies that have compensated them in the previous year for labor/services provided. No taxes are being paid by the company on behalf of the independent contractor. On the other hand, employees of a company receive payments from their employer and the employer is obligated to withhold associated taxes. In addition, employees typically receive W-2 tax forms from their employer for the previous year's employment.
Obvious questions remain...how does one differentiate between an "independent contractor" and an "employee"? Can companies and individuals elect to be treated one way or the other? Does the company have the power to determine the designation?
The designation is determined by the applicable statutes in the particular state and the related tax code. This designation is not an "election" and the standards cannot be "waived." The IRS provides a general outline aimed at differentiating between independent contractors and employees and the stemming implications.
The IRS outline is helpful in a general sense, but the analysis must be done on a case-by-case basis by the employer before the relationship is established. In addition, employers must take into account that the roles and responsibilities of an independent contractor may alter during the course of the relationship and that "independent contractor" that was hired may ultimately morph into an "employee."
Things become messy when an individual begins to realize they have been (or believe to have been) misclassified as an independent contractor when they were legally an employee of the company, as defined by legal and tax authority. The individual realizes that he/she is responsible for all the taxes associated with his/her labor/services for the previous year and any additional applicable taxes, such as self-employment tax. This is where the conflict arises and the relationship goes sour.
Companies/employers and employees/independent contractors need to address this designation issue at the outset of the relationship and understand the implications (both legally and from a tax perspective).
If you are an employee and believe you have been misclassified or if you are an employer who needs assistance with these designation issues, please contact Richardson "Red" Griswold of Griswold Law today.
For further reading on this topic, be sure to check out the complete list of employment law articles.