When you take a job, especially a job as a household employee, it may not be clear whether you are an “employee” or an “independent contractor.” An employee usually has taxes withheld by their employer, receives a regular paycheck, and gets a W-2 at the end of the tax year. An independent contractor is like a one-person business, and is paid based on contracted work, receiving a 1099 at the end of tax season. However, there are situations where being an employee instead of an independent contractor is beneficial – or actually required by law. Talk to a California tax attorney like those at NewPoint Law Group, LLP if you need help with how you are classified for taxation purposes.
Should I Receive a 1099 or a W-2?
Independent contractors and employees both must be paid for the work they do. However, there are other benefits and requirements depending on which status you carry as a worker, and each has its own requirements for tax planning and filing. The first step toward understanding which class you fall into is understanding each class’ definition.
The definition of an employee may seem simple, but there are many areas where this definition is clouded. In the common sense of the word, we understand an employee to be someone who works for a company. However, there are specific factors where this definition falls short. Under US tax law, an employee is defined by the employer’s control over their behavior and finances, and their general relationship.
An employee’s behavior is typically controlled by their employer. This means that the employer controls the hours and location of their work. The employer provides materials, tools, and assignments, as well as instructions and training. Employees are also under the financial control of their employees. This means that the employer is the one who makes decisions about how much to pay the employee, what work expenses they will reimburse the employee for, and how the employee gets paid (e.g. monthly vs. bimonthly, via check vs. direct deposit, etc.). Employers also have control over the benefits, vacation time, pension, and sick days an employee gets, and makes decisions about how long the job will last, and what contracts or employee handbooks the employee must agree to.
Independent contractors, on the other hand, are not subject to these controls. Independent contractors decide their own work hours, where their office is (or whether they work from home), how the job gets done, how much the job costs (which is obviously up to negotiation), and any other terms of their day-to-day. Basically, independent contractors are self-employed, rather than relying upon a boss. As the name implies, there is usually some contract or agreement, oral or written, that governs how much the job costs, how and when the client pays for the work, and what work the contractor should perform.
If you fall under the definition of an “employee,” you should get a W-2. If you fall under the definition of an “independent contractor,” you should receive or fill-out a 1099.
Is it Better to Be an Employee or an Independent Contractor?
This distinction between employees and contractors is very important. Under IRS rules, it is illegal to misclassify a worker as an independent contractor when they should be paid as an employee. First, employees are taxed at the appropriate tax rate for their income. Independent contractors are instead taxed more like businesses, and may have to pay a higher tax rate. However, this is not the only factor to consider, as there may be bigger tax breaks for being self-employed or having a home office, saving you more money overall.
If you are an employee, there are some clear benefits. First, employers are responsible for withholding your state and local taxes, paying half of your FICA taxes, and issuing you a W-2. This may make record keeping and taxpaying easier, especially since using a W-2 may allow you to file a 1040 EZ. Employees are also protected under state laws. Employers must pay fulltime employees certain hourly wages, and may be required to give them break time, vacation time, and benefits. Even for household employees like housekeepers, gardeners, and nannies, these rules may apply, and require tax withholding and reporting.
If you are an independent contractor, you reap the benefits of being self-employed. This may give you more flexibility, and the ability to gain more by working more, as opposed to facing an hourly wage. It may also open up tax breaks and other benefits. However, it may mean a higher tax rate. It also means you must pay your own taxes in (at least) quarterly installments, you must pay the self-employed equivalent of FICA taxes, and must file additional schedules with your annual tax return to account for your 1099s.
Keep in mind that, if you work multiple jobs, you may be receiving both W-2s and 1099s, which may make doing your taxes even more complicated.
Roseville, CA Tax Attorneys
If you need help understanding whether you should be paid and taxed as an employee or an independent contractor, talk to a tax attorney today. The Roseville tax lawyers at NewPoint Law Group, LLP can help you choose your work status and help with filing complex tax forms. For a free consultation with our attorneys, call 800-358-0305 today.