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Are you an employee or an independent contractor?

We often get asked this question, whether a person is an employee and should be issued a W-2 or is the person an independent contractor and should be issued a Form 1099-NEC. The main difference is that if the person is an employee then payroll taxes have to be paid by the employer and on behalf of the employee. If the person is an independent contractor you pay them what they earn and then simply issue that person a Form 1099-NEC at the end of the year to show the yearly compensation. For this reason many employers would rather have the person classified as an independent contractor but the IRS says not so fast! The IRS has guidelines on whether or not a person should be classified as an employee or an independent contractor. Per the IRS, the main questions to ask are:

• Behavioral Control − does the company control or have the right to control what the worker does and how the worker does the job?
• Financial Control − does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? (Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.)
• Relationship of the Parties − are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If the employer has the above control over a worker then typically the worker will be an employee.

There are penalties for those employers that incorrectly classify a worker as an independent contractor instead of an employee so you want to go through the above questions to make sure you do it correctly.

The information provided in this blog does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. Please consult your tax advisor on all the above issues.

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