Mistakes Can Make Your Tax Bill Hurt Even More

With today's economy and job market, more people are cobbling together several jobs to make a living. Sometimes the lines get blurry between employee classifications, and a mistake could leave you with a with a bigger tax debt than you expected.

When in Doubt, Get Help

Some types of independent contractors may be treated as employees for tax purposes. The different classifications will affect your tax debt. If in doubt about your status, talking to a tax pro could rescue you from a big tax debt and a lot of headaches.

The "Independent" in Independent Contractor

Classification of workers is primarily a function of how much control they have over their work. Just because an employer calls you an independent contractor doesn't mean you are one. For example, a Nevada a flower deliverer found herself unable to collect unemployment benefits after her employer cut back on staff because the employer had reported her status as "independent contractor." She appealed, her status was changed to "employee," and her employer had to pay some fines and back taxes. This happened because although her employment agreement was titled "Independent Contractor Agreement," it contained stringent rules about how she did her job, from what she had to wear when delivering flowers to who she could have riding with her (in her own vehicle), and what hours she would work. Obviously the company exercised far too much control over how she performed her job for her to be classified as "independent."

Statutory Nonemployees

In some cases, workers classified as employees for other purposes (such as making the employer liable for the employee's mistakes) are "unclassified" as employees for the purpose of taxation. Direct sellers and licensed real estate agents are statutory non-employees. This means that although they work for only one employer and have to give up some control over how they do their job, they have to pay their own employment taxes and deduct their business-related expenses just like an independent contractor.

Most of their earnings as direct sellers or real estate agents are directly related to sales or other output, not to hours worked, and their services are performed under a written contract stating they will not be treated as employees for federal tax purposes.

Statutory Employees

In other cases, workers who you'd expect to be considered independent contractors get treated as employees for tax purposes. Examples of statutory employees include some full-time insurance agents, delivery drivers who are paid on commission or act as their employers' agents, some outside salespeople who represent their companies, and some who manufacture goods from home to their employers' specifications. The key to being a statutory employee is primarily that of representation or agency -- if you have lots of control over your work but you represent your employer to clients or vendors, you might be a statutory employee -- look to see if the "statutory employee" box is checked on your W-2 form when you do your taxes. Statutory employees have the best of both worlds -- their employer pays their employment taxes for them, but they get to deduct work-related expenses against their income on a Schedule C.

Employment status is determined by several factors -- how much control you have over how you do the job, whether you perform work for more than one company, if you bill for hours worked, jobs completed, commissions earned, or are paid a regular salary, and if you represent yourself as an employee or agent of your employer. A mistake on your status can cost you money, so if you think you might be classified incorrectly a consultation with a good tax pro might save you money.

Source:
IRS