Chronicles of Tax Advisors
Uncle Sam wants his money up front! That is the primary reason the government challenges the validity of an independent contractor status. When you are an employee, the employer is required to withhold payroll taxes from your payroll check. The government gets its money on a current, ongoing basis when you receive a paycheck. If you are an independent contractor, you must account for the financial activity of your own business, and the customer you contract with is not required to withhold any taxes from his payment to you for services you perform (as long as you provide that contractor with a W-9).
During the last two decades the IRS has gone back and forth in their aggressiveness in attacking the independent contractor status. At one time, they were inclined to respect established business practices of an industry, but were not required to do so. An example of this was their recognition of how newspapers treated their carrier force as independent contractors.
The key determining factor in whether the IRS will treat you as an employee or independent contractor is ‘CONTROL’. That is, does the business that contracts with you supervise the detail of the work you do? Or does that business only point you to the work it wants done and expect you to complete the task in the manner you see fit? If the business supervises the detail of the work, you will probably be classified as an employee of that business.
So, if your intent is to be classified as an independent contractor, aka independent business man, then there are a few things you can do to ensure the IRS will respect that intent. First and foremost, you must control how you perform the work that you accept from the customer. You should negotiate and consummate a contract with your customer. The terms of that contract should lay out the general work you are to perform, how you are to submit invoices to the customer, who is to provide liability and workers compensation insurance for the work you do, and other common terms of a contract, including termination of the contract. You should also apply with the IRS for an EIN (employer identification number) and file a W-9 with each customer you do business with. With this on file, payments to you should not be subject to any income tax withholding.
As an independent contractor you should receive a 1099 from every customer who paid you at least $600 by January 31 of the following year (you should receive all your 2015 1099s by January 31, 2016). This information is reported to the IRS. You aggregate the total amounts from all 1099s and typically report this as your business income, against which you apply all legitimate business expenses incurred to arrive at taxable profit.
Dave Motes, CPA
Authorized to practice before the Internal Revenue Service
A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals.