Being in control
One of the big issues in the tax realm is the problem of whether a person, who is working for another person, is an employee or an independent contractor. Because there are huge tax ramifications on both sides, and if a person has been misclassified as one or the other, than there could be huge penalties and even legal consequences.
First of all, what makes a person an employee or an independent contractor? That is answered with one word respondeat superior (which is Latin literally meaning “let the master answer”), or in other words is the person subject to command and/or control of another. If there is such a relationship, then there is a pure employer/employee relationship. Some of the factors that the IRS would look to see if there is a respondeat superior, or a command and/or control relationship are as follows:
· Behavior control – again is there command and/or control of another
· Financial control – who is more in control of the business’s financial affairs, and/or often a person is paid for his/her work, or even whether the person will be reimbursed for his/her out-of-pocket business expenses;
· Relationship – what is the legal relationship is there a written contract, and what are specific contractual terms, etc.
· Where is the work performed?
· What set hours the work must be performed, if any?
· Who must or who does provide the requisite tools/materials, in order for the work to be performed?
After looking at some of these, and other factors, if it appears that a person is an employee, then of course there has to be income tax, and payroll tax withholdings on his/her wages and/or salary. If not, then the person is really an independent contractor, and really self-employed, and responsible to pay for his/her own income taxes, especially for the Self-Employed Taxes, which is Social Security and Medicare taxes as both an employer and an employee.
So if you want us to review or need to check if any of your associates, are employees or independent contractors, contact Kayatax your Orange County accountant.