An individual's employment status plays a pivotal role in their income taxes during filing season. In some cases, however, determining how to classify a worker can be difficult, and individuals who may not be considered regular employees will need to pay close attention in order to file correctly.

This is largely because individuals who are employed as independent contractors fall under different tax guidelines than regular employees. Independent contractors are responsible for withholding their own income, Social Security and Medicare taxes because these amounts will not be withheld from their paychecks like a traditional employee. In addition, independent contractors are also required to make quarterly estimated tax payments to the IRS.

However, independent contractors also gain some tax benefits in the form of deductions during filing season. For example, they may claim a home office deduction and write off a portion of their rent or mortgage, utilities, and equipment. In addition, contractors may also deduct mileage for business-related travel and 100 percent of their health insurance premiums.

There is often some confusion over whether certain workers are classified as independent contractors or employees. For example, individuals who work from home out of their personal office may seem like independent contractors in theory, but if they fall within certain rules, they may still be labeled employees by IRS guidelines. Differentiating between the two can be challenging, but there are some basic guidelines that the IRS uses to define the work relationship and determine an individual's status.

The IRS categorizes individuals by whether they pass certain relationship tests. The first test, the right to control, focuses on whether the employer has the authority to control how workers do their jobs and the other functions they perform. Second, the IRS examines how workers are paid, whether expenses are reimbursed and who provides the equipment and supplies needed to complete the job. Lastly, the IRS examines the type of relationship between employers and workers, such as whether written contracts exist and whether benefits are extended. Benefits include health insurance, vacation time and pension plans. Independent contractors are not extended benefits, while employees generally are. Typically, the more flexibility a worker has in terms of these three tests, the more likely they are to be considered an independent contractor.

Workers who are unsure which category they fall into should consult with a tax preparer to avoid tax liability issues that can result from misclassification.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

About Liberty Tax Service® 
Liberty Tax Service® is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service® has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.   

Liberty Tax Service® is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.