You’ve heard about the independent contractor vs. employee question. Most of the time, discussions revolving around the topic are designed to help business owners determine if someone they’re counting as a 1099 independent contractor (and therefore not required to withhold taxes, offer benefits to, etc.) is actually classified by the government as an employee. But what if you’re in business for yourself and trying to figure out if you’ve set up your arrangement with a large client properly? 

The IRS recently came out with a helpful document to help people determine if they’re an employee or an independent contractor. There are three main areas that the document looks at in defining the difference.

  1. Behavioral Control — Does your client tell you how to do the work you do for him or her? Does your client tell you what tools or equipment to use or what assistants to hire? Does he or she provide you with training on procedures and work methods? If so, you may be dealing with an employer/employee situation, rather than a client/contractor situation.
  2. Financial Control — Do you have a significant investment in your work? Do you supply your own equipment? Are you not reimbursed for many business expenses? Could you incur a loss or make a profit in your work? If so, this indicates you’re an independent contractor.
  3. Relationship of the Parties — Do you receive insurance benefits or paid leave? This shows that you’re an employee. Do you have a contract that spells out that you’re a separate entity and defines the nature and method of the work you’re doing? This helps to set you apart as an independent contractor.

So why does it matter? Your classification affects several things: how you pay your taxes, what taxes you’re responsible for, how you file your tax return, and your eligibility for social security and Medicare benefits. It also becomes a factor in lawsuits and liability issues. If you’re filing improperly and get audited, you’ll face a complicated mess that you’ll have to sort through, as well as fines and the possibility of being responsible for back taxes. It’s not something you want to ignore.