What Kind of Worker Are You? Job Classifications for Tax Purposes
Although doing work for a company seems straightforward enough, your job classification is vital when it comes to questions such as “what kind of worker am I?” or “what tax form should I file?” For the most part, there are two types of workers — employees and independent contractors. While there is a lot of crossover, finding out the answer can help you out both in the workplace and on your taxes.
Usually, all you need to do is take a simple look at your onboarding materials or contracts, or contact your superior. Once you know, the difference between independent contractor vs. employee can come into play throughout your professional life. From benefits to your company’s expectations of you, there’s a lot that your worker classification can tell you.
Are you an employee or independent contractor? Here are some of the things you need to know about job classifications.
If you set the price of your work, determine how, where and when things will be done and use your own supplies, this points to an independent contractor relationship. Technically, this means you work for yourself, and the company is the client. Companies don’t offer benefits like health insurance or paid leave and require that the worker does their own taxes. This means you’ll do your taxes quarterly like a freelancer.
If the company controls what, how and when you do your work, this points to an employee relationship. In some states, if the work performed is integral to the business, the worker must be classified as an employee. In this relationship, the company withholds federal and state taxes rather than expecting the worker to do that themselves. Employees are also offered benefits like health insurance, 401(k)s, vacation time and sick leave.
When it comes to determining a worker’s status, there are a few common-law rules that set the tone, starting with the behavioral element. To put it simply, if you set your own hours and schedule, determine how you do the job and work on your terms, you could make a case that you’re an independent contractor. However, if your employer manages how you do your job and what you do, that makes the case for employee status.
Another determining factor in your job classification is the financial element. If the worker determines the rate, this points to independent contractor status. On the other hand, if it’s determined by the employer, they should be considered an employee. If the company offers reimbursement for materials or requires that you use their materials, that points to employee status, as well.
Type of Relationship
The last determining factor is the nature of the relationship between the company and the worker. Usually, if there’s training involved as well as benefits, and the relationship is consistent and ongoing, that usually speaks to an employee. However, if things work on a contractual or project-by-project basis without training or benefits, you’re likely an independent contractor.
Worker Classifications for Taxes
Essentially, what this all means is that if you are an employee, you file your taxes once a year, and you don’t withhold your own state or federal taxes, as your company does that for you. If you’re an independent contractor, you file your taxes quarterly and withhold your own state and federal taxes.
While some of this may seem a bit complicated, once you know your classification, it becomes much easier to get into a routine and know what to do on your taxes and in the workplace. If you have any questions, be sure to ask your employer so they can set the record straight.
This guest post was authored by Alyssa Abel
Alyssa is a college and career writer who offers advice on strategies to success. Read more of her work on her blog, Syllabusy.