Employers are required to submit annual wage reports to workers, in order to provide the IRS with income for tax purposes, and so the worker can file an income tax return. It is critical that business owners/ hirer or etc correctly determine whether the individuals providing services are employees or independent contractors.Before employer can determine which form (W-2 or 1099-MISC) to use to report income, she must first determine whether you are employee or independent contractor. The IRS considers workers to be employees unless it can be proven that they are independent contractors. In general, an individual is an independent contractor if he/she has the ?right to control or direct only the result
of the work and not the means and methods of accomplishing the result.on the contrary, in general, if you are a contractor who provides services to other businesses or individuals or etc then you are generally considered self-employed. To determine whether a worker is an independent contractor, the law uses a so-called ?control? test. This test looks at a number of factors to evaluate whether an employer has the right to exert control over the manner and means by which the worker performs his or her services
In a legal context, the classification of a worker
as either an employee or an independent contractor
can have significant consequencesAn employer's tax liability is determined by your employment status. When you are a regular w2 employee, employer must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When you are an independent contractor, the hiring party is not required to make any of these payments.
Should employers incorrectly define a worker as an independent contractor, they may find themselves liable for past taxes including FICA and federal unemployment tax. Safe harbors which allow employers to use the independent contractor status and avoid penalties include: prior practice of treating similar employees as independent contractors and the existence of a prior IRS audit where no taxes were required to be paid.