When you start working at home for others, it’s important that you know if you are considered to be an independent contractor or an employee of that company. It has implications for how you pay your taxes as well as how you perform your work.
Employers don’t always get it right, either. Some will label you as an independent contractor while treating you as an employee.
What’s the Difference Between an Independent Contractor and an Employee?
The best place to figure out if you’re an independent contractor or an employee is the IRS website. They’re the ones enforcing the rules when it comes to taxes. You don’t want to get it wrong.
They generally follow these three common law rules to determine if a particular person is an independent contractor or an employee (quoted from the IRS website):
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: 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?
Sometimes you’ll deal with a business that stretches these rules to call people independent contractors, when they should be considered employees. They do this to avoid paying benefits, unemployment insurance, and taxes on your income. When you’re really an independent contractor, these things are your problem.
Simply put, an employer has much more control over how an employee does his or her job than they do over an independent contractor. They also have more obligations to an employee.
What Does This Mean for Work at Home Jobs?
A work at home job can be either a job where you’re an employee or an independent contractor. A lot of them want to call employees independent contractors, but many companies have learned the hard way to be more careful about that. It’s expensive for companies to get it wrong if they are caught by the IRS misclassifying employees as independent contractors. Suddenly they’ve missed paying a lot of taxes.
When an opportunity says you’ll be an independent contractor, take a look at what they’re requiring of you. Sometimes they’ll have it right, but other times they won’t.
Getting it wrong has implications for you as well. If you’ve been taking advantage of being a business on your taxes (as you are when you work as an independent contractor), you may find out that you’ve taken some deductions that won’t work out if you’re an employee.
What Should You Do as an Independent Contractor?
Being an independent contractor is not as simple as landing a freelance position in most areas, at least not legally speaking. You can often get away without all the business registration stuff, but if you get caught most areas have pretty heavy fines you’ll be facing. Better to make your business legal.
That means naming your business and getting a Fictitious Business Name (FBN) or Doing Business As (DBA) as required in your area. Check with your county clerk website or Chamber of Commerce for details. You may also need a business license or tax registration certificate.
Having a business name is also necessary if you want to open a bank account in the name of your business. If you’re going to be receiving checks in that name, you’ll need that account. Most banks will want proof that you have registered your business name before opening an account for you in that name.
Having a business name also enhances how professional you appear to clients. You aren’t just some person taking in work. You’re a professional who has taken the time to formally start a business.
If you really are an independent contractor, then the companies or people you work for will not be taking out taxes from your income. That’s your responsibility, and you should be doing that quarterly. These are called estimated taxes, and you’re responsible for them on any income that is not subject to withholding.
You may also want to get an Employer ID Number (EIN), even if you aren’t employing anyone yourself. This gives you a number other than your Social Security Number by which to identify your business for tax purposes.
What If an Employer Calls You an Independent Contractor When You’re Really an Employee?
This is a tough one. You can talk to your employer politely and find out why they consider you to be an independent contractor rather than the employee you think they’re treating you like. It’s something to be done with caution, as it may impact your employment with them.
If they’re calling you an independent contractor, you can also insist on being treated like one. Set your own hours. Take on other clients. Remember the good parts about being an independent contractor.
You can just ignore the situation if you like, while keeping in mind the potential tax issues on your side. Fortunately, if you’re acting as an independent contractor and paying your estimated taxes, you’re not likely to be underpaid when it comes time to file. But it can be worth the work experience to just cope with a misclassification.
You can get a lawyer, but think carefully first. This will very likely impact your employment, and you might not want to do that.