Law Students' Corner - Washburn
| Publication year | 2019 |
| Pages | 72 |
| Citation | Vol. 88 No. 10 Pg. 72 |
November, 2019
Independent Contractor vs. Employee: Getting it Right with the IRS
by Lori A. McMillan and Lindsay Bayles
Independent contractors and employees may be difficult to distinguish at a glance. The uninformed may consider them similar, which can create confusion because different tax considerations attach to each classification. Businesses may face situations that pose a genuine question regarding the appropriate classification of a worker. However, most of the time, there is no credible controversy whether a worker is one or the other. Attempts to misclassify the worker are actually impermissible attempts to lower taxes.
Independent contractors are in business for themselves, and usually work for various clients using their own expertise and experience. Independent contractors pay self-employment taxes and are able to lower their taxable income through deductions for amounts incurred while carrying out their trade or business. Employees typically work for one employer and use their skills in a manner dictated by the employer.
Why Does the Distinction Matter?
After the Tax Cuts and Jobs Act, employees likely have little to no deductions available to them for costs incurred relating to employment. Conversely, independent contractors are still allowed to deduct ordinary and necessary expenses incurred carrying on a trade or business.
Employers incur payroll taxes, or more accurately the law dictates that employers and employees each pay a 7.65 percent payroll tax. Research, however, demonstrates the true incidence of a payroll tax is borne mostly by employees in the form of lower wages.[1] Businesses using the services of an independent contractor do not have to pay this tax. Employers must also pay social security and Medicare taxes on employee income, are responsible for state and federal unemployment insurance, and must withhold and remit employee income tax payments on the remuneration paid for each pay period. Depending on the type of business, the owner might also have to pay excise taxes.[2]
Employees
Whether or not someone is an employee is a question of fact. No one factor is determinative, rather the analysis is based on the totality of the circumstances. Control is the most important consideration in determining the relationship, and there are numerous ways to demonstrate control. Generally, if the payor has the right to direct only the result of the work, the individual is an independent contractor. Employees are characterized by the ability of the payor to direct or control the work and the manner in which it is done. This is true even if the payor does not exercise the right to control—it is sufficient if the right exists. Other factors that weigh towards classifying a worker as an "employee" are control over financial aspects of the work and the relationship established between the parties.
Control Over the Work Done
To determine whether a worker controls the work done...
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