Employee, Independent Contractor or Partner

• Author: Lionel S. Sobel
• Pages: 137-153

137

CHAPTER 7

Employee, Independent

Contractor or Partner

Employee or Independent Contractor

Why the Difference between Employees

and Independent Contractors Matters

Nontax Reasons

Tax Reasons

Deduction of Business Expenses

Employment Taxes

IRS’s Preference

What Is the Difference?

Consequences of Misclassifying Employees

as Independent Contractors

To Employer

To Employee

Independent Contractor or Partner

Tax “Partnership”

Allocation of Partnership Income

Consequences of Operating Informally Rather Than

as a Partnership

There is a difference between

• “employees” and

• those who are “self-employed,” “independent contractors” or

“sole proprietors.”

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138 CHAPTER 7

There also is a difference between

• independent contractors who simply co-own income produc-

ing property, and

• partners.

Both of these differences have significant tax implications, for

entertainers as well as for others.

Employee or Independent Contractor

The terms “self-employed,” “independent contractor,” and

“sole proprietor” all mean the same thing. It’s fine to use them

interchangeably, insofar as the law is concerned. But the terms may

have slightly different connotations in everyday conversation.

“Sole proprietor” suggests someone who owns his or her own

business as an individual—that is, without operating the business

as a partnership, corporation, or limited liability company. “Self-

employed” suggests someone who has many clients or customers at

the same time, rather than just one or a few. “Independent contractor”

suggests someone who performs services for one company at a

time, under circumstances that may make that person look like an

“employee” even though he or she is not.

These suggested meanings are not legally significant. No matter

which term is used, taxpayers who are “self-employed,” “independent

contractors,” and “sole proprietors” all report their income and

deductible expenses on Schedule C to Form 1040—a schedule that is

titled “Profit or Loss From Business (Sole Proprietorship).”

This chapter concerns taxpayers who perform services that may

make them look like “employees” even though they may not be, so

this chapter refers to them as “independent contractors.”

Why the Difference between Employees

and Independent Contractors Matters

The difference between employees and independent contractors

matters for reasons that have nothing to do with tax and for reasons

that have everything to do with tax.

Nontax Reasons

The nontax reasons for distinguishing between employees and

independent contractors matters, both to employers and to those who

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