For many individuals, self-employment as an independent contractor can be a rewarding and satisfying career option. As is true with any employment relationship you enter, it’s important to understand the roles and responsibilities of everyone involved.
Q1. What would my employment status be as an independent contractor?
There is a fundamental difference between being employed on a full-time regular basis by an employer and engaging in an independent contractor relationship. An employment relationship involves being placed on the employer’s payroll. Employees will be paid either a pre-determined amount (on an hourly or salaried basis),on a commission basis (which means earning income based on a sales-based schedule), or some combination of base pay and commission. All income earned is subject to federal,state, and local taxes, where applicable, and typically, the employer withholds those taxes from the employee’s paycheck. All income earned during the course of a calendar/tax year is reported to the employee and to the federal government by the employer on the form W-2. The employer determines the employee’s work methods and evaluates the employee’s performance.
Independent contractors are self-employed. Independent contractors engage in a contracted agreement to provide services to a client in exchange for an agreed upon fee(lump sum, hourly, weekly, monthly, etc.), which may include some form of commission. Independent contractors are not placed on an employer’s payroll; instead, the independent contractor invoices the client for work performed and the client pays the independent contractor through Accounts Payable. The client does not withhold federal, state, and local taxes from the payment, and the independent contractor is responsible for satisfying all tax obligations. All income earned during the course of a calendar/tax year is reported to the independent contractor and to the federal government by the client on form 1099.
The independent contractor is responsible to the employer for the end “product” but determines his/her own work methods. Most organizations are careful to distinguish independent contractors from employees. The federal government has adopted common law principles to determine an independent contractor relationship for federal income tax purposes. (Please refer to the checklist at the end, which can be used to assist in determining if someone is an employee or an independent contractor.) You should also be aware that courts in different jurisdictions may apply different tests for making the determination.