As a freelancer, independent contractor, or consultant, you have a variety of tax issues to consider. However, before you begin in calling yourself an independent contractor it is important to determine your true working status.

The Right to Control

The IRS uses a “right to control test” in defining an independent contractor. It is NOT by any means a cookie-cutter checklist, but a dynamic approach in viewing the nature of the working relationship. It highlights three areas of the employment:

  • Financial control
  • Behavioral control and
  • Relationship between the parties.

This test also includes guidelines such as the amount of instruction, length of professional relationship, location, and payment schedule. In this framework, independent contractors retain control over schedule and hours worked, jobs accepted, and performance monitoring. They also have financial control in terms of major investment in equipment, furnish their own supplies, provide their own insurance and repairs, and cover other expenses related to their business.

Independent Contractors are Often Misclassified

Note that being labeled as an independent contractor by the payer does not automatically classify you as one. The U.S. Department of Labor has found that misclassification of employees as independent contractors has increased, in part due to the larger issue of restructuring of business organizations. This is a huge problem, because “real” employees labeled as an independent contractor may not receive important workplace protections. In addition, misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. As The U.S. Department of Labor puts it, “….the economic realities of the relationship, and not the label an employer gives it, are determinative.”

Behavioral Control

That being said, the general consensus 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. You do not qualify as an independent contractor if you perform services if an employer controls “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.

For example, if a furniture store controls the end product, but not necessarily how the furniture is put-together, then you are considered an independent contractor of the store.

Self-Employment Tax

Something independent contractors need to be careful about is how they handle their own taxes. Unlike an employee, where most taxes are taken out before you even receive a paycheck, independent contractors must take care of their own tax records and pay a self-employment tax.

For this reason, it is absolutely essential independent contractors keep meticulous records.

Need Tax Guidance as an Independent Contractor?

To stay compliant with taxes as an independent contractor, it is important to talk to your financial adviser about the tax rules and documentation you need. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.