Employee Vs. Independent Contractor
The difference between an independent contractor and an employee may seem pretty self-explanatory, but there are many companies out there advertising 1099 jobs, using unethical business practices, and taking advantage of individuals not familiar with their role with being self-employed.
Companies are aware of how many people are attracted by the idea of working independently, and having flexibility and control over their own time. As a result, they are hiring independent contractors to fill all sorts of positions. It benefits the company greatly by not having to pay for benefits that a W2 employee would normally receive. However, as an entrepreneur it’s important to know when you’re actually working as an independent contractor, or simply a non-benefited employee.
While there are many reasons for both the employee and the company to know the difference between classifications, one main reason to know the difference is — taxes.
Companies save money on taxes, because independent contractors are responsible for paying all their own taxes at the end of the year. So, if you’re not sure how to classify yourself, or how to even file your taxes being self-employed, you risk the chance of being audited, and having to dish out more money than necessary.
According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
“You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
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