Welcome to the next episode of a brand new video series that we're calling "Ashley Explains," where our resident tax guru, Ashley Hamilton, lays down the facts about tax!
In this episode, Ashley Explains the difference between Employees and Independent Contractors, and the importance of classifying them correctly. Enjoy!
NOTE: The information provided in this video is based on 2018 rules and regulations. We will work to update this episode annually as these rules change.
Read the Transcript:
When it comes to determining whether or not you should be treating your workers as a 1099 independent contractor, or an employee, somebody receiving a W2, it's less about what you would like to treat them as, and more about what the IRS is telling you have to treat them as. And they have a common law test to help you make that determination. If you are treating someone who should be an employee as a independent contractor to avoid paying employment taxes, you are potentially opening yourself up to penalty and lawsuit by doing that.
The IRS's common law test basically helps you determine whether or not the worker should be considered employee, or an independent contractor. They say employees are required to comply with the employer's instructions about when, where, and how to work. They work exclusively for the employer. They're hired by the employer. They're subject to dismissal, and can quit without any liability. Has a continuing relationship with the employer. The work is done personally. They perform services under the company's name. They're usually paid a salary, are reimbursed for expenses, participate in company's fringe benefit programs. The company furnishes tools, equipment, materials, and training. If they're an outside salesperson, a company provides leads, sets terms and conditions of sale, assigns a territory and controls the sale process.
If they're an independent contractor, they usually set their own hours, determines their own sequence of work. They can work from multiple employers. They're self employed. A contract governs how the relationship can be severed. They're usually paid by the job. They control the sales process and terms. They furnish their own tools, equipment, and training. There's usually substantial investment by the worker. They're permitted to employ assistants. And they perform services under the worker's business name. And have an opportunity for profit and loss.
Got any tax questions you would like Ashley to explain?
Email her at firstname.lastname@example.org