When you provide your services to a company, you may be an employee or an independent contractor, depending on your relationship with the company and how you provide the services. There are a number of factors that determine whether you should be treated as an independent contractor or an employee. For example, as indicated on the Find Law website, if you work the hours set by the company, you usually work at the company’s place of business, you work under the control and direction of the company, and you carry out tasks in the way the company has requested, you may be considered an employee rather than an independent contractor.
Being treated as an independent contractor versus an employee has financial and other types of consequences. As pointed out by the U.S. Small Business Association, as an independent contractor you would be paid only for the work performed and would not be entitled to overtime or employee benefits. You would generally not be covered by workers’ compensation benefits and would not be protected under equal opportunity laws. And you would not be eligible for unemployment benefits.
As an independent contractor you pay self-employment tax (15.3% in 2014) on your earnings, which means that you pay both the employer and employee portions of the FICA tax (social security and Medicare). As an employee, only the employee portion of FICA tax (7.65%) is withheld from your pay and the employer pays its corresponding half.
As an independent contractor, federal and state income tax would not normally be withheld from your pay. So you would generally have to make estimated income tax payments to cover your federal and state tax liability.
A company might classify you as an independent contractor rather than an employee because it is unaware of the criteria for classification as an employee. Or situations may change over time. Your relationship with the company may have started out as an independent contractor but has now become more of an employer-employee relationship. Or the company might be treating you as an independent contractor to avoid paying FICA and unemployment taxes and the employee benefits it would have to pay if you were an employee.
If you feel that you are incorrectly being treated as an independent contractor instead of an employee, you could start by raising the matter with the company’s human resources department or with the person in the company who contracted you.
If you cannot obtain an adequate resolution directly with the company, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. The IRS will review the facts and circumstances and will make a determination of your status as either an employee or independent contractor. According to the IRS, this determination can take up to six months.
If the IRS determines that you are an employee and the employer does not make the necessary changes, you could file a lawsuit against the employer under the Fair Labor Standards Act, state unemployment laws, workers’ compensation laws or others, depending on how you have been affected.
On the other hand, as pointed out by Nolo, if the IRS determines that you are actually an employee, you could suffer some consequences. The company might decide not to use your services anymore because it doesn’t want to pay the additional costs of keeping you as an employee. Or the company might reduce your compensation in order to cover the additional employee expenses.
If it is determined that you are an employee and the employer is not properly withholding payroll taxes, the IRS has Form 3949-A, Information Referral. This form is used to report tax law violations, in this case the failure by an individual or business to withhold legally owed taxes such as social security and Medicare taxes from income paid to employees.
Being an Independent Contractor vs. Employee, Find Law
Form 3949-A, Information Referral
Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Independent Contractor (Self-Employed) or Employee? IRS
Self Employed & Independent Contractors, U.S. Small Business Administration
Working as an Independent Contractor FAQ, Nolo