A contractor is a person or company that is hired to perform a specific task or project. They are considered self-employed and are responsible for their own taxes and benefits.
An employee, on the other hand, is hired by a company or organization and is considered an official member of the staff. They are typically entitled to benefits such as health insurance and retirement plans, and their employer is responsible for withholding taxes from their paycheck.
The IRS has specific guidelines for determining whether a worker should be classified as an employee or an independent contractor. Generally, if a worker is classified as an employee, the employer is responsible for withholding taxes and paying Social Security and Medicare taxes. Independent contractors are responsible for paying their own taxes.
The IRS uses a three-part test to determine a worker's classification, known as the "common law test", which takes into account:
Behavioral control: The degree to which the employer controls what the worker does and how they do it.
Financial control: The degree to which the employer controls the worker's financial aspects, such as expenses and income.
Relationship of the parties: The nature of the relationship between the worker and the employer, including factors such as permanency of the relationship and whether the worker is provided benefits.
It is important to note that even if a worker is classified as an independent contractor by the employer, the worker may still be considered an employee by the IRS if they do not meet the criteria of the common law test.
Call an accountant near you to make sure you're in compliance with your employees and independent contractors.
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