Contract Employee vs. Independent Contractor Are you an employee for Defense Base Act Insurance purposes but an Independent Contractor for Tax purposes? |
| The Wars Come Home The Defense Base Act Compensation Blog If your are receiving DBA benefits they are not taxable and you do not have to file paperwork on them Were you injured prior to 2006 and lost your expat status for US Taxes? Under provision IRC 662 (a) you are exempt from the time requirement of being out of the country for the full 330 days. IRS Form 2555 (Foreign Earned Income) was revised 2006 Determination of Worker Status for purposes of Federal Employment Taxes and Income Tax WIthholding IRS Form SS-8 Combat Zone Pay Exclusion A-8 The combat zone military pay exclusion applies only to members of the U.S. Armed Forces. Neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for an exclusion of income earned while working in a combat zone or qualified hazardous duty area. They may, however, qualify for an extension of deadlines to file and pay taxes. Foreign Earned Income and Housing: Exclusion – Deduction You may be able to exclude up to $91,400 of your foreign earned income in 2009. Tax Guide for U.S. Citizens and Resident Aliens Abroad Employer's Tax Guide to Fringe Benefits Blackwater Dodges Taxes Tax Evasion or Fraud Combat Support Associates, CSA dodges taxes for a decade WASHINGTON (AP) — When the Pentagon announced an obscure California company had won a lucrative military contract, no one mentioned any plans for a Caribbean outpost — a tropical shell the company quickly created that allowed it to duck millions in taxes and deflect U.S. lawsuits. It's legal, at least for now. Contractors large and small have been heading offshore to shield piles of taxpayer dollars, according to an Associated Press investigation, but irate lawmakers are thundering that they'll put an end to it. Almost a decade ago, a few months after winning the deal that has totaled more than $2 billion, Combat Support Associates established its subsidiary in the Cayman Islands, a British territory and tax haven. read story here MPRI dodges taxes Shell Firms Shielded Contractor Boston Globe May 4 2008 by Farah Stockman full story here WASHINGTON - In March 2005, one of the Pentagon's most trusted contractors - Virginia-based MPRI, founded by retired senior military leaders - won a $400 million contract to train police in Iraq and other hotspots. Two months later, MPRI set up a company in Bermuda to which it subcontracted much of the work. It was not the first time that MPRI executives had used a shell company in an offshore tax haven to perform government-funded work. A year earlier, MPRI headed a joint venture that won a $1.6 billion contract to provide US peacekeeping forces in Kosovo and elsewhere. Three months later, MPRI set up a company in the Cayman Islands to do the work. Like MPRI's Bermuda subsidiary, the Cayman Islands company appears to have no phone number, website, or staff of its own there. Blackwater Dodges Taxes |
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Special Note: If your company is not paying their part of your SS and Medicare
Taxes then you are not an employee, they cannot claim you as an employee when
they purchase the DBA insurance they are required to get in order to even get the
government contracts.
In the Blackwater case for instance it would seem they are either guilty of tax
evasion or have fraudulently mis represented their employees so that the taxpayer
would have to pay for their insurance.
The first $91,400 you make is said to be tax free. There are still the social security
and medicare taxes to pay and there is no longer a wage limit on these. These
taxes will amount to 15%+ of your wages if you are classified as a contractor. If
you are classified as an employee your employer is responsible for paying for half
of these.
Merely labeling a worker as an independent contractor is not enough. They must
actually be an independent contractor.
If you do misclassify an employee as an independent contractor, you must pay the
IRS all back-taxes owed, plus interest, plus penalty (12% - 35% of the total tax bill).
Unlike an employee who is limited to workers' compensation benefits, an
independent contractor can sue you for negligence if they're injured on the job.
DETERMINING WHETHER JOE IS AN EMPLOYEE OR AN
INDEPENDENT CONTRACTOR
Unfortunately, as far as the various government agencies are concerned, there is not one single
test that determines whether Joe is your employee or an independent contractor. Even more
difficult, it is quite possible that for the purposes of one government agency Joe is considered to
be an independent contractor while for another he is
treated as an employee.
=> The IRS/Common Law "Control" Test
The IRS follows the common law "control" test for determining whether someone is an employee
or independent contractor. This test looks at 20 factors as being indicative (and only indicative)
of whether the person is an employee or independent contractor. The test basically involves a
balancing of these factors -- which way does the scale tip?
Here are the IRS factors:
1. Whether the worker can earn a profit or suffer a loss from the activity (if so, the more likely it is
that the worker is an independent contractor).
2. Whether the worker is told where to work (indicative of employee status).
3. Whether the worker offers his or her services to the general public (indicative of independent
contractor status).
4. Whether the worker can be fired by the hiring firm.
5. Whether the worker furnishes the tools and materials needed to do the work (indicative of
independent contractor status).
6. Whether the worker is paid by the job or by the hour (independent contractors are more likely
to be paid by the job; employees by the hour).
7. Whether the worker works for more than one firm at a time (indicative of independent
contractor status).
8. Whether the worker has a continuing relationship with the hiring firm (indicative of employee
status).
9. Whether the worker invests in equipment and facilities (indicative of independent contractor
status).
10. Whether the worker pays his or her own business and traveling expenses (indicative of
independent contractor status).
11. Whether the worker has the right to quit without incurring liability (indicative of employee
status).
12. Whether the worker receives instructions from the hiring firm (indicative of employee status).
13. Whether the worker is told how to perform the work (indicative of employee status).
14. Whether the worker receives training from the hiring firm (indicative of employee status).
15. Whether the worker performs the services personally.
16. Whether the worker hires and pays assistants (indicative of independent contractor status).
17. Whether the worker sets his or her own working hours (indicative of independent contractor
status).
18. Whether the worker provides regular progress reports to the hiring firm.
19. Whether the worker works full-time for the hiring firm (indicative of employee status).
20. Whether the worker provides services that are an integral part of the hiring firm's day-to-day
operations (indicative of employee status).
It is important to note that none of the above factors are, of themselves, determinative. The IRS
will balance all of the factors to determine which side of the equation is favored.
Internal Revenue Service
Independent Contractors vs. Employees
Before you can determine how to treat payments you make for services, you must first
know the business relationship that exists between you and the person performing the
services. The person performing the services may be -
An independent contractor
A common-law employee
A statutory employee
A statutory nonemployee
In determining whether the person providing service is an employee or an independent
contractor, all information that provides evidence of the degree of control and
independence must be considered.
It is critical that you, the employer, correctly determine whether the individuals
providing services are employees or independent contractors. Generally, you must
withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay
unemployment tax on wages paid to an employee. You do not generally have to
withhold or pay any taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent
contractor, you can be held liable for employment taxes for that worker,
plus a penalty.
Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work
done by an independent contractor, and not the means and methods of accomplishing the result.
Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical
work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10
weeks. This is not considered payment by the hour. Even if she works more or less than 400
hours to complete the work, Vera Elm will receive $6,400. She also performs additional
electrical installations under contracts with other companies, that she obtained through
advertisements. Vera is an independent contractor.
How should I report payments made to independent contractors?
You may be required to file information returns to report certain types of payments made to
independent contractors during the year. For example, you must file Form 1099-MISC,
Miscellaneous Income, to report payments of $600 or more to persons not treated as
employees (e.g. independent contractors) for services performed for your trade or business.
For details about filing Form 1099 and for information about required electronic or magnetic
media filing, refer to information returns.
Who is a Common-Law Employee (Employee)?
Under common-law rules, anyone who performs services for you is your employee if you can
control what will be done and how it will be done. This is so even when you give the employee
freedom of action. What matters is that you have the right to control the details of how the
services are performed.
To determine whether an individual is an employee or independent contractor under the
common law, the relationship of the worker and the business must be examined. All evidence of
control and independence must be considered. In an employee-independent contractor
determination, all information that provides evidence of the degree of control and degree of
independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three
categories: behavioral control, financial control, and the type of relationship of the parties. Refer
to Publication 15-A, Employer's Supplemental Tax Guide for additional information.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control
what will be done and how it will be done.
Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto
dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days
and times. She appraises trade-ins, but her appraisals are subject to the sales manager's
approval. Lists of prospective customers belong to the dealer. She has to develop leads and
report results to the sales manager. Because of her experience, she requires only minimal
assistance in closing and financing sales and in other phases of her work. She is paid a
commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of
health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
Statutory Employees
If workers are independent contractors under the common law rules, such workers may
nevertheless be treated as employees by statute ( statutory employees ) for certain employment
tax purposes if they fall within any one of the following four categories and meet the three
conditions described under Social security and Medicare taxes , below.
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery
products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is
paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or
annuity contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be
returned to you or to a person you name, if you also furnish specifications for the work to be
done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you from
wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar
establishments. The goods sold must be merchandise for resale or supplies for use in the buyer
s business operation. The work performed for you must be the salesperson s principal business
activity. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental
Tax Guide for additional information.
Statutory Nonemployees
There are two categories of statutory nonemployees: direct sellers and licensed real estate
agents. They are treated as self-employed for all Federal tax purposes, including income and
employment taxes, if:
Substantially all payments for their services as direct sellers or real estate agents are directly
related to sales or other output, rather than to the number of hours worked and
Their services are performed under a written contract providing that they will not be treated as
employees for Federal tax purposes.
Refer to information on Direct Sellers located in Publication 15-A, Employer s Supplemental
Tax Guide for additional information.
Misclassification of Employees
Consequences of treating an employee as an independent contractor. If you classify an
employee as an independent contractor and you have no reasonable basis for doing so, you
may be held liable for employment taxes for that worker. See Internal Revenue Code section
3509 for additional information.
References/Related Topics
Tax Topic 762 Basic Information
To determine whether a worker is an independent contractor or an employee, you must examine
the relationship between the worker and the business. All evidence of control and independence
in this relationship should be considered. The facts that provide this evidence fall into three
categories Behavioral Control, Financial Control, and the Type of Relationship itself.
Taxes then you are not an employee, they cannot claim you as an employee when
they purchase the DBA insurance they are required to get in order to even get the
government contracts.
In the Blackwater case for instance it would seem they are either guilty of tax
evasion or have fraudulently mis represented their employees so that the taxpayer
would have to pay for their insurance.
The first $91,400 you make is said to be tax free. There are still the social security
and medicare taxes to pay and there is no longer a wage limit on these. These
taxes will amount to 15%+ of your wages if you are classified as a contractor. If
you are classified as an employee your employer is responsible for paying for half
of these.
Merely labeling a worker as an independent contractor is not enough. They must
actually be an independent contractor.
If you do misclassify an employee as an independent contractor, you must pay the
IRS all back-taxes owed, plus interest, plus penalty (12% - 35% of the total tax bill).
Unlike an employee who is limited to workers' compensation benefits, an
independent contractor can sue you for negligence if they're injured on the job.
DETERMINING WHETHER JOE IS AN EMPLOYEE OR AN
INDEPENDENT CONTRACTOR
Unfortunately, as far as the various government agencies are concerned, there is not one single
test that determines whether Joe is your employee or an independent contractor. Even more
difficult, it is quite possible that for the purposes of one government agency Joe is considered to
be an independent contractor while for another he is
treated as an employee.
=> The IRS/Common Law "Control" Test
The IRS follows the common law "control" test for determining whether someone is an employee
or independent contractor. This test looks at 20 factors as being indicative (and only indicative)
of whether the person is an employee or independent contractor. The test basically involves a
balancing of these factors -- which way does the scale tip?
Here are the IRS factors:
1. Whether the worker can earn a profit or suffer a loss from the activity (if so, the more likely it is
that the worker is an independent contractor).
2. Whether the worker is told where to work (indicative of employee status).
3. Whether the worker offers his or her services to the general public (indicative of independent
contractor status).
4. Whether the worker can be fired by the hiring firm.
5. Whether the worker furnishes the tools and materials needed to do the work (indicative of
independent contractor status).
6. Whether the worker is paid by the job or by the hour (independent contractors are more likely
to be paid by the job; employees by the hour).
7. Whether the worker works for more than one firm at a time (indicative of independent
contractor status).
8. Whether the worker has a continuing relationship with the hiring firm (indicative of employee
status).
9. Whether the worker invests in equipment and facilities (indicative of independent contractor
status).
10. Whether the worker pays his or her own business and traveling expenses (indicative of
independent contractor status).
11. Whether the worker has the right to quit without incurring liability (indicative of employee
status).
12. Whether the worker receives instructions from the hiring firm (indicative of employee status).
13. Whether the worker is told how to perform the work (indicative of employee status).
14. Whether the worker receives training from the hiring firm (indicative of employee status).
15. Whether the worker performs the services personally.
16. Whether the worker hires and pays assistants (indicative of independent contractor status).
17. Whether the worker sets his or her own working hours (indicative of independent contractor
status).
18. Whether the worker provides regular progress reports to the hiring firm.
19. Whether the worker works full-time for the hiring firm (indicative of employee status).
20. Whether the worker provides services that are an integral part of the hiring firm's day-to-day
operations (indicative of employee status).
It is important to note that none of the above factors are, of themselves, determinative. The IRS
will balance all of the factors to determine which side of the equation is favored.
Internal Revenue Service
Independent Contractors vs. Employees
Before you can determine how to treat payments you make for services, you must first
know the business relationship that exists between you and the person performing the
services. The person performing the services may be -
An independent contractor
A common-law employee
A statutory employee
A statutory nonemployee
In determining whether the person providing service is an employee or an independent
contractor, all information that provides evidence of the degree of control and
independence must be considered.
It is critical that you, the employer, correctly determine whether the individuals
providing services are employees or independent contractors. Generally, you must
withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay
unemployment tax on wages paid to an employee. You do not generally have to
withhold or pay any taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent
contractor, you can be held liable for employment taxes for that worker,
plus a penalty.
Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work
done by an independent contractor, and not the means and methods of accomplishing the result.
Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical
work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10
weeks. This is not considered payment by the hour. Even if she works more or less than 400
hours to complete the work, Vera Elm will receive $6,400. She also performs additional
electrical installations under contracts with other companies, that she obtained through
advertisements. Vera is an independent contractor.
How should I report payments made to independent contractors?
You may be required to file information returns to report certain types of payments made to
independent contractors during the year. For example, you must file Form 1099-MISC,
Miscellaneous Income, to report payments of $600 or more to persons not treated as
employees (e.g. independent contractors) for services performed for your trade or business.
For details about filing Form 1099 and for information about required electronic or magnetic
media filing, refer to information returns.
Who is a Common-Law Employee (Employee)?
Under common-law rules, anyone who performs services for you is your employee if you can
control what will be done and how it will be done. This is so even when you give the employee
freedom of action. What matters is that you have the right to control the details of how the
services are performed.
To determine whether an individual is an employee or independent contractor under the
common law, the relationship of the worker and the business must be examined. All evidence of
control and independence must be considered. In an employee-independent contractor
determination, all information that provides evidence of the degree of control and degree of
independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three
categories: behavioral control, financial control, and the type of relationship of the parties. Refer
to Publication 15-A, Employer's Supplemental Tax Guide for additional information.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control
what will be done and how it will be done.
Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto
dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days
and times. She appraises trade-ins, but her appraisals are subject to the sales manager's
approval. Lists of prospective customers belong to the dealer. She has to develop leads and
report results to the sales manager. Because of her experience, she requires only minimal
assistance in closing and financing sales and in other phases of her work. She is paid a
commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of
health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
Statutory Employees
If workers are independent contractors under the common law rules, such workers may
nevertheless be treated as employees by statute ( statutory employees ) for certain employment
tax purposes if they fall within any one of the following four categories and meet the three
conditions described under Social security and Medicare taxes , below.
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery
products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is
paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or
annuity contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be
returned to you or to a person you name, if you also furnish specifications for the work to be
done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you from
wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar
establishments. The goods sold must be merchandise for resale or supplies for use in the buyer
s business operation. The work performed for you must be the salesperson s principal business
activity. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental
Tax Guide for additional information.
Statutory Nonemployees
There are two categories of statutory nonemployees: direct sellers and licensed real estate
agents. They are treated as self-employed for all Federal tax purposes, including income and
employment taxes, if:
Substantially all payments for their services as direct sellers or real estate agents are directly
related to sales or other output, rather than to the number of hours worked and
Their services are performed under a written contract providing that they will not be treated as
employees for Federal tax purposes.
Refer to information on Direct Sellers located in Publication 15-A, Employer s Supplemental
Tax Guide for additional information.
Misclassification of Employees
Consequences of treating an employee as an independent contractor. If you classify an
employee as an independent contractor and you have no reasonable basis for doing so, you
may be held liable for employment taxes for that worker. See Internal Revenue Code section
3509 for additional information.
References/Related Topics
Tax Topic 762 Basic Information
To determine whether a worker is an independent contractor or an employee, you must examine
the relationship between the worker and the business. All evidence of control and independence
in this relationship should be considered. The facts that provide this evidence fall into three
categories Behavioral Control, Financial Control, and the Type of Relationship itself.