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Are You a Contractor or Employee?

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As the pandemic continues, many long-time employees are now picking up jobs that classify them as independent contractors (think Uber or Lyft). In the meantime, states like California are trying to force the definition of employees upon companies. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.

As a contractor: If you are a worker and you are not considered an employee you must;

  • pay self-employment taxes (Social Security and Medicare related taxes)
  • make estimated federal and state tax payments
  • handle your own benefits, insurance, and bookkeeping

If you are an employer: You must ensure you categorize employees and independent contractors correctly. Getting this wrong in the eyes of the IRS can lead to;

  • additional payments and penalties related to Social Security and Medicare taxes
  • payment of possible overtime, including penalties for a contractor reclassified as an employee
  • legal obligation to pay for benefits

How can you know the correct classification?

In determining whether a worker is an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the business over the work done and they assess the level of independence of the employee. For example:

  • The more the employer has the right to control when the work is done, how the work is done, and where the work is done, the more likely the worker is an employee.
  • If the financial relationship is controlled primarily by the employer, the arrangement is likely to be viewed as an employer/employee one, instead of that of an independent contractor. To clarify, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.

The IRA provides significant guidance on this issue through its website.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.

Regardless of whether you are a business owner or an independent contractor, we’re here to help you get this question (and all of the financial things that come with it!) right.


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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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