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Contractor vs Employee: Decoding the Tax Differences

 

It doesn't matter whether you have been a work at home mom for a long while or if you just started, it is a must for you to understand the difference between a contractor vs an employee. It's also important to understand how the difference can affect you when it comes to taxes. It's vital to understand the difference between a contractor versus an employee because it will affect not only you, but the forces that hire you and pay you.

Contractor Defined

First of all, if you have been doing business as a contractor or if you are about ready to deem yourself a contractor, you need to able to clearly define what that means. A contractor, in the eyes of the IRS (Internal Revenue Service), is typically termed an independent contractor. An independent contractor is normally hired to do a specific service or job under contract. The independent contractor has the right to choose how and when any specific job will get done as long the end result follows the initial contract, or agreement. Payment is made to an independent contractor as agreed upon, usually in lump sum when the work is complete.

Employee Defined

An employee is a person doing business for and under someone else. This means the employee must perform and be at work according to the direction of the employer. The employer pays the employee every week, two weeks or month. The employee is a direct reflection of the employer and must perform as such.

Tax Implications of a Contractor

The work, or contract, of an independent contractor is typically short term, generally speaking. This means that the pay for services, or work done, is often submitted to the contractor in a lump sum when the work is done. This also means that a form W-9 and either a social security number or business identification number (BIN) are required before the work even begins. The independent contractor has the sole responsibility of paying any taxes that are required to be paid. The independent contractor is entitled to a form 1099 Misc. for tax purposes if the work or services performed totaled more than $600.

Tax Implications of an Employee

Generally, the employee has it easier as far as taxes are concerned, than an independent contractor. That's because it is the responsibility of the employer to pay the employee on time and as often as agreed and to pay all taxes associated with employment. Of course, the employee is still required to file personal taxes and pay what is owed. An employee must file a form W-4 and provide identification to the employer before any work begins. The employer is obligated to provide an employee with a W-2 for tax purposes each year.

There are benefits and challenges to both a contractor and an employee, and you must do what works best for you and your family. Whatever terms you do decide on, be sure you have the proper contracts and paperwork in place to protect yourself when it comes to tax time.

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