What is “an independent contractor?” What is “self-employed?” For anyone running a small business alone, knowing what the relationship between these two are paramount for tax purposes.
The problem with the “self-employed” label is that anyone who works for themselves and pays taxes as such consider themselves self-employed. However, in certain situations you may be an employee and exempt from paying the self-employment tax.
What is Self-Employed?
- You operate a business or trade service as a sole proprietor or an independent contractor.
- You are a member of a partnership that operates a business or trade service.
- You are in a business for yourself not mentioned above (including a part-time business).
The IRS says you are Self-Employed only if you control how your product or service you provide is serviced to your customer or client.
What is an Independent Contractor?
By IRS definition, an independent contractor is someone who offers their services or product to the general public and is free from an employer-employee relationship. Examples of Independent Contractors would be:
- Lawyers, accountants/bookkeepers, and other technical services
- Doctors, dentists, and private-practice medical offices
- Contractors or Sub-Contractors in the construction trade
- Public Stenographers, auctioneers, or other specialty trades
What Else Does the IRS Say?
The label of an “independent contractor” is determine solely by the interaction the business has with their client. If a person’s business is controlled by an employer, meaning if the employer can dictate how a service is performed, the business or person may be an employee and not subject to the Self Employment tax. However in this situation, FICA (Social Security tax and Medicare) and income tax withholding would be taken out by the employer. If they are not withheld, the business owner will still be responsible for paying FICA and income tax.
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