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This Employment Tax Resource Courtesy Of
The Independent Contractor Report
James R. Urquhart III, Esq.
Editor

Three Law Books

IRS Publication 1779

Independent Contractor Or Employee

(Rev. 2-97)

Editor's Note

Publication 1779, Independent Contractor or Employee, is written as a tax resource for the payee-worker rather than the payer-firm. This may explain why it is such a brief or short publication.

The publication explains three main facts that the IRS uses to determine whether a worker is an independent contractor or an employee:

  • Behavioral control
  • Financial control
  • Relationship of the parties

In general, the usual common-law rules cited in IRC 3121(d)(2) still apply. This IRS publication is an attempt to simplify a complex, confusing and highly subjective set of worker classification rules. It does not modify existing statutory or decisional law. The publication is a much needed attempt by the IRS to restate the area in an easy to understand format.

Full Text of Pub. 1779

Which are you? For federal tax purposes, this is an important distinction. Worker classification affects how you pay your federal income tax, social security and Medicare taxes, and how you file your tax return. Classification affects your eligibility for benefits and your tax responsibilities. If you aren't sure of your work status, you should find out now. This brochure can help you.

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These relevant facts fall into three main categories: behavioral control; financial control; and relationship of the parties. In each case, it is important to consider all the facts -- no single fact provides the answer.

BEHAVIORAL CONTROL

These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done -- as long as the employer has the right to direct and control the work. For example:

Instructions -- if you receive extensive instructions on how work is to be done, this suggests that you may be an employee. Instructions can cover a wide range of topics, for example:

  • how, when, or where to do the work
  • what tools or equipment to use
  • what assistants to hire to help with the work
  • where to purchase supplies and services

If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Training -- if the business provides you with training about required procedures and methods, this suggests that the business wants the work done in a certain way, and you may be an employee.

FINANCIAL CONTROL

These facts show whether there is a right to direct or control the business part of the work. For example:

Significant Investment -- if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.

Expenses -- if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.

Opportunity for Profit or Loss -- if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

RELATIONSHIP OF THE PARTIES

These are facts that illustrate how the business and the worker perceive their relationship. For example:

Employee Benefits -- if you receive benefits, this is an indication that you are an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.

Written Contracts -- a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

WHEN YOU ARE AN EMPLOYEE

Your employer must withhold income tax and your portion of social security and Medicare taxes. Also, your employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of tax withheld.

You may deduct employee business expenses on Schedule A of your income tax return, but only if they total more than two percent of your adjusted gross income.

WHEN YOU ARE AN INDEPENDENT CONTRACTOR

The business may be required to give you Form 1099-MISC, Miscellaneous Income.

You are responsible for paying your own income tax and self-employment tax (self employment contributions act -- SECA). The business does not withhold taxes from your pay.

You may deduct business expenses on Schedule C of your income tax return.

INTERNAL REVENUE SERVICE TAX FORMS AND PUBLICATIONS

If you are not sure whether you are an employee or an independent contractor, get Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Form SS-8 and the following IRS publications can help you:

IRS Publications are available free by calling 1-800-829-3676.

INTERNAL REVENUE ELECTRONIC SERVICES

If you have access to a personal computer, you may download and print any of 600 federal tax forms and instructions, approximately 90 tax publications, and other tax information materials on:

Internet

World Wide Web -- http://
www.irs.ustreas.gov

FTP -- ftp.irs.ustreas.gov

Telnet -- iris.irs.ustreas.gov

Modem (703) 321-8020

IRS TaxFax

To get a listing of 100 IRS tax forms, call (703) 487-4160
from a fax machine. Follow voice prompts to get forms faxed
back to you.

Often your tax questions can be answered by reading tax publications and related forms. But when you need more information, you may call the IRS at 1-800-829-1040.

[End of IRS Publication 1779]