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Understanding the difference between independent contractors and employees

In a post last week, we discussed how a recent survey found that 80 percent of millennials were fearful of making some type of error on their tax return, and how experts attributed much of this trepidation to the fact that many in this age demographic earn a living via a series of jobs, which, in turn, necessitates sophisticated tax planning.

One question that naturally arises when a person earns their income primarily through this gig economy is whether they are properly considered an independent contractor or an employee.

The distinction matters because independent contractors and employees receive different tax treatment as far as the federal government is concerned.

  • Independent contractors: Since the business from which they receive payment will not withhold taxes, anyone classified as an independent contractor is responsible for ensuring that income tax and the self-employment tax are paid. Indeed, it may prove necessary to make periodic payments throughout the year to ensure tax liabilities are covered.
  • Employees: The business from which employees receive payment will withhold the necessary taxes and provide the employee with a W2 at the end of the year outlining all of the taxes withheld. Unreimbursed business expenses may also be deducted provided they are itemized and are more than 2 percent of adjusted gross income.     

All of this naturally begs the question then as to how a person can tell whether they are an employee or a contractor. While this is an easy determination for some, the line may be understandably blurry for others.

In our next post, we'll examine the facts that courts frequently consider when determining whether a person is a contractor or employee -- relationship of the parties, behavioral control and financial control.

If you have any questions or concerns relating to a state or federal tax matter, consider speaking with an experienced legal professional who can examine your situation, answer your questions and pursue solutions.

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