How To Know If You’re An Employee Or A Contractor – And Why It Matters

A job is a job, right? If we’re talking taxes, not all job types are the same. Here’s why your “employment status” matters: If your employer says you’re an independent contractor (Form 1099-NEC income), but you think you’re an employee (Form W-2 income), you may be surprised by a large tax bill when you file your income tax return.

That’s because independent contractors have to pay their own income tax and self-employment taxes throughout the year, while employers withhold and cover parts of these taxes for employees.

Man contemplating if he’s an employee or contractor

Millions of workers are surprised every year when they get IRS Form 1099-NEC (before 2020 this was the 1099-MISC) and end up with a tax bill because they haven’t paid enough (or any) taxes on that income. Also, if you don’t pay estimated taxes during the year, you can get hit with an estimated tax penalty. Learn more about estimated tax payment exceptions.

So, it’s important for employers and employees to get the employment relationship right, because the consequences can be expensive. Many times, employers make the decision on a worker’s status. But, it’s a “facts and circumstances” test, and each person’s situation is different.

What’s your employment relationship with the business?

Who has financial control and runs the business aspects of your job?

What’s your employment relationship with the business?