Independent Contractor or Employee?
Many optometrists working in private practice, opticals, or even commercial modalities are considered independent contractors as opposed to employees. Oftentimes, there is not much of a difference between the two in regards to how you are treated or what your work entails. However, a large distinction presents itself in how you are paid and your tax obligations.
It is imperative that business owners also understand the difference between the two entities, as mistakenly classifying an employee as an independent contractor can result in serious fines and penalties.
The definition of an independent contractor is defined by the IRS as:
“People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. 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.” (1)
“Right to control” is the key to understanding if you should be classified as an independent contractor or employee. What does “right to control” mean?
Independent contractors are considered self-employed individuals. If the business owner has significant control over the person providing services, then by definition, that individual is an employee.
Some important points to consider when examining degree of control:
- Does the business owner control what the individual providing services does, or how work is performed or completed?
- Does the business owner provide specific instructions or guidelines on how to complete work?
- Can the business owner terminate the individual at any time before work has been completed?
- Is the work being performed a required task to operate the business regularly?
If the answers to the aforementioned questions are typically “yes,” then this individual is likely an employee, not an independent contractor.
Conversely, an independent contractor is an individual who typically:
- Works for multiple business performing similar services, or has a separately established business that provides similar services to the general public.
- Is able to make decisions that will impact his or her profitability directly such as purchasing supplies, equipment, or advertising resources.
- Provides his or her own equipment to complete work or tasks.
To aid and assist in this process, the IRS has put together a checklist to scrupulously examine the nature of the employer - employee relationship to help determine if an individual is an independent contractor or employee.
If the checklist still does not provide clarity in determining whether or not an individual is an independent contractor or employee, then Form SS-8 can be filed with the IRS, who will then make a determination on the proper classification of the business - individual relationship.
Why is all of this so important?
There are very important tax implications between employees and independent contractors. If an individual providing services within a place of business is categorized as an employee, then that business owner must withhold income taxes, withhold and contribute payments toward Social Security and Medicare taxes (FICA), and pay unemployment tax. Conversely, a business owner is not required to pay or withhold any taxes for independent contractors.
As you can see, business owners have a clear benefit in categorizing individuals as independent contractors due to mitigated tax obligations in unemployment taxes and Medicare and Social Security withholdings. Self-employed individuals, or independent contractors, are required to file an annual return and pay estimated quarterly taxes, including income tax and self-employment tax (Social Security and Medicare tax).
A critical thing that independent contractors must know, is that they are responsible for the full tax rate for FICA (Medicare and Social Security) which is roughly 15.3 percent. Whereas, employed individuals are only responsible for 7.65 percent. (2) Although required to pay more taxes, independent contractors can deduct business expenses and itemize deductions.
There are important forms for independent contractors.
Income for independent contractors is reported on a 1099-MISC as opposed to a W2 tax form that employees receive. Both forms are necessary when filing taxes and reporting income to the IRS. If a business is hiring an independent contractor for work, that individual should complete Form W-9.
This form as defined by the IRS, “can be used to request the correct name and Taxpayer Identification Number, or TIN, of the worker. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). The W-9 (PDF) should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.” (3) If a business pays an independent contractor $600.00 or more for work provided in a calendar year, then that business must file Form 1099-MISC and provide a copy of it to the independent contractor for tax filing purposes.
What to do if you are misclassified?
There are tax advantages for businesses to classify individuals as independent contractors as opposed to employees, but once again, if a business improperly classifies an individual, that business can face serious penalties and fines. It is important that if you are being treated as an employee, you are being paid as one.
If you believe you are being misclassified as an independent contractor, you should speak to your place of business. If no solution is reached, workers can file Form SS-8 to receive proper classification from the IRS, and then can file Form 8919 to recuperate any excess self-employment taxes if the IRS does indeed confirm status as an employee versus an independent contractor.
There are important factors to consider when determining if you as an individual are performing work as an employee or an independent contractor. These factors affect how work is conducted within a place of business and financial obligations. It is critical that you have an in-depth conversation with your employer before work begins as to whether or not you will be acting as an employee or an independent contractor.
