Accounting Services in Miami can help you determine whether an individual is an employee or an independent contractor is essential for any business can help you determine whether an individual is an employee or an independent contractor is essential for any business. The characteristic of the worker will determine who is responsible for withholding and paying certain taxes. If the person is an employee, then the employer is responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment tax on wages paid to an employee. If the person is self-employed, then the self-employed individual may be responsible for paying self-employment tax and making quarterly income tax payments. An Accounting Services in Miami can help you determine whether an individual is an employee or an independent contractor is essential for any business VieraCPA point out there are three categories used to determine if a person is self-employed: behavior, financial and the type of relationship.
Accounting Services in Miami Quick-Tips:
- What you call the worker does not determine the true characterization of the worker.
- Each work situation is unique and not one single factor will determine if a worker is an independent contractor or an employee. All factors must be weighed together.
Accounting Services in Miami note the distinction between an independent contractor and an employee has important tax consequences. However, determining the right classification of a worker is sometimes difficult. The United States tax code does not provide a definitive definition of an employee. Instead, the United States courts have established a test that evaluates many different factors to classify workers as independent contractors or as employees.
The test to determine whether a worker is an independent contractor or an employee is not a definitive test but is different for each worker. The courts have looked at many different factors to determine whether a worker is an independent contractor or an employee, and not any one factor is controlling. The factors that apply for one worker may not be the same for another worker, according to Gustavo A Viera managing partner of an Accounting Services in Miami.
The factors can be grouped into three categories: behavioral control, financial control, and the relationship of the parties.
The behavioral control factors examine the businesses right to control or direct the worker’s. If the business controls the worker, then the worker is an employee. A business has control if the business says how, when, and where the worker will complete the work. This includes control over what tools or equipment is used, where to purchase supplies, or the order or sequence the work is to be completed. It also includes the amount of training or instruction provided by the business and whether the evaluation system is of the detail of the work or the final product.
Financial control factors evaluate whether the business has the right to control the economic aspects of the workers’ job. The factors that fall under financial control include investments costs, expense reimbursement, the method of payment, and economic risk.
An independent contractor will often make significant investments in the personal equipment he or she uses to perform the work. There is no set dollar amount that a worker must spend to be classified as an independent contractor. For many professions there may be minimal investment costs by the worker and in others it may require significant investment in equipment. These investment expense and other work related expenses are not likely to be reimbursed by the business if the worker is an independent contractor.
An independent contractor will likely incur other expenses for advertising and maintaining a visible business location.
The method of payment is can help determine whether a worker is an independent contractor or an employee. Employees typically are paid a regular wage for an hourly, weekly, or other time period. On the other hand, an independent contractor is typically paid a flat fee for the job. However, in some professions it is typical to pay independent contractors on an hourly basis.
Accounting Services in Miami VieraCPA points out another factor under financial control is who bears the economic risk. Typically, an employee bears little risk of incurring a loss. The independent contractor, on the other hand, may have made a significant investment and have other expenses they may not be reimbursed and therefore, risks completing the job at a loss.
Type of Relationship
The type of relationship denotes how the worker and the business view their relationship to each other. Evaluation of the relationship depends on any written contracts, any benefits the worker may receive, the length of the job, and how important the tasks completed by the worker are for the business.
The contract language does help explain the relationship of the parties but the contract by itself is not determinative as to the character of the worker. Also any benefits the worker may receive, such as insurance, pension plans, paid vacation, sick days, and disability insurance, are typically reserved for employees and not given to independent contractors. The length of the job is also important. If the worker is hired for a specific project or a specific period it is likely the worker is an independent contractor. Employees, on the other hand, are hired with the expectation that the position will last forever.
The type of work performed is another factor to help determine the relationship. If the worker is performing an essential task of the business, it is likely that the person is an employee and not an independent contractor.
Despite a worker being characterized as an independent contractor under the factors above, certain workers may be classified as an employee by the United State Code. For an worker to be classified by statute as an employee the worker must be within one of the four following categories and must satisfy three requirements.
The worker must be fall within one of these four categories:
- A driver who delivers meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services as an agent or commission-driver for the employer.
- A full-time insurance salesman who sells life insurance or annuities, or both, for primarily one life insurance company.
- A home-worker who performs work, with the specifications from the business, on materials or goods provided by the business and that must be returned to the business or another designated person by the home-worker
- A traveling or city salesman who works full-time for one company and solicits and transmits orders back to the company of merchandise for resale or supplies for business use to wholesaler, retailer, contractor, or operators of hotels, restaurants, or other similar establishments.
In addition to being within one of these categories, the following conditions must be met:
- The contract for services must state or imply that substantially all of the work must be completed by the worker;
- The worker must not have any substantial investment in the equipment used to perform the work (except for transportation equipment); and
- The work is part of an ongoing relationship and not a single transaction.
The U.S. tax code specifies that some workers shall not be classified as employees but instead must be treated as independent contractors. In general, real estate agents and direct sellers shall not be treated as workers if substantially all of the payments are related to sales or other output, rather than to the number of hours worked, and the services are performed under a written contract that states that the worker will not be treated as an employee for Federal tax purposes.
Tax Consequences of Characterization
The characterization of the worker as an independent contractor or an employee has significant tax consequences. If the worker is classified as an employee, then the employer is responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment tax on wages paid to an employee. If the person is self-employed, then the self-employed individual may be responsible for paying self-employment tax and making quarterly income tax payments.
If it is unclear as to whether a worker is an independent contractor or an employee, then the business or the worker may request a determination as to the proper classification be made by the Internal Revenue Service. A business or worker may complete Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS to determine proper classification. Determination will typically take 6 months. There is no fee for seeking a determination.
It is important you understand what type of worker you are. If you are an independent contractor you may be personally liable to pay Self-Employment tax and make quarterly estimated tax payments.
If it is uncertain whether a worker is an independent contractor or an employee, the business or the worker may file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the Internal Revenue Service to determine that proper classification.