U.S. employers must determine whether the person they hire is an employee or an independent contractor for federal and state tax purposes.
If an individual is an employee, the employer must withhold federal income taxes and FICA taxes for Social Security and Medicare, and the employer must report the wages and taxes on Forms 941, 940, and W-2.
If the individual is an independent contractor, the employer is generally not required to withhold taxes and must only report the compensation on an annual Form 1099-NEC.
What are some characteristics that distinguish an employee from an independent contractor?
Employee Relationship
- Hired to perform specific work at the direction of the employer
- The employee is economically dependent on the employer for income because it is their only job
- The company controls what the worker does, how they must complete the job, and when and where they must work
- Has a subordination relationship with the employer
- The onboarding process requires training the employee
Independent Contractor
- Hired to perform a task or project with little direction from the company
- Generally has multiple clients, so not financially dependent on the company
- The company does not exercise control over the contractor
- A contractor is independent, so they are not subordinate to the company
- There is no onboarding process, so no training is required
Below is a summary of the various forms and filings, depending on whether the person is an employee or independent contractor.
Employee Taxes, Compliance & Reporting
- I-9 (Employment Eligibility Verification)
- Form W-9 (Request for Taxpayer Identification Number and Certification)
- Form W-2 (Wage and Tax Statement)
- Form 941 (Employer Quarterly Federal Tax Return)
- Form 940 (Employer Annual FUTA Return)
Independent Contractor Compliance & Reporting
- Form W-9 or Form W-8BEN (Certificate of Foreign Status for Individuals)
- Form 1099-NEC (Nonemployee Compensation)
If an employer or an employee is uncertain about the worker classification, either party can file Form SS-8 with the IRS.