The rule of thumb in determining if you are an employee or an independent contractor (Self Employed) is based on the business relationship (primarily looking at the “right to control” or independence) that exists between you and the firm.
Evidence of the degree of control and independence fall into three categories: the right to control behavior, financial aspects and the type of relationship between you and the firm.
Behavior controls consist of who determines HOW the agreed upon work gets done. You are probably independent if you behave independently and determine when, where and how you do the work.
- You decide your own work hours
- You decide what tools and assistance you need to perform
- The instructions from the firm primarily explain the results desired, but allow you do get the job done in the way that most suits your expertise and work style
- Evaluation is based on results of your work not how you performed the work
- You bring your own training and methods to the activity you perform
Financial Controls consist of who is providing the financial investment to get the work done. You are probably independent if you have a substantial financial investment in the work you do.
- You provide your own tools, supplies and equipment
- You have expenses for which you will not be reimbursed by this firm
- You have the potential to make a profit or a loss
- You advertise and seek other opportunities to provide your services to the market
- You are being paid a fee for the project you are working on
Type of Relationship refers to the perception of the relationship between you and the business. You are probably independent if your relationship is different from employees in the firm and is temporary.
- You have a contract that specifically delineates your activities
- You do not receive benefits that are typical for employees in the firm
- There is a pre-determined end time for your services
- The services you provide are not the same as those provided by employees
The IRS has no cut and dry rules for determining the status of a worker as employee or independent contractor, factors which are relevant in one situation may not be relevant in another. However, it is critical that your status is determined correctly because this has a HUGE impact on the way income, Social Security and Medicare taxes are paid and withheld.
Generally, a business must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The business generally does not have to withhold or pay any taxes on payments to an independent contractor; these taxes are the responsibility of the independent contractor.
A worker can request that the determination be made about their own status, or a firm can ask for a determination to be made by the IRS for a class of worker. Both use SS-8 for that purpose.