Determination if a Sales Representative or Marketing Representative is An Employee or an Independent Contractor -1099--for Federal Tax Purposes

The issue of  whether a sales representative or marketing representative  is an independent contractor or an employee seems to be a hot topic these days.  There are a number of factors that go in to determining whether or not one is considered a 1099 independent contractor.  Moreover, the law for purposes of torts liability can be different from that for tax purposes so one needs to be careful and specific as to what purpose he or she is trying to determine if a worker is an independent contractor or an employee.

Below is information for making this determination for federal tax purposes:

Form 1099-MISC & Independent Contractors

Question: How do you determine if a worker is an employee or an independent contractor?

Answer:

The determination can be complex and depends on the facts and circumstances of each case.  The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services.  It is not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.
There are three basic categories of factors that are relevant to determining a worker's classification:

• Behavioral control (whether there is a right to direct or control how the worker does the work);
• Financial control (whether there is a right to direct or control the business part of the work); and
• Relationship of the parties (how the business and worker perceive the relationship).

For more information on employer-employee relationships, refer to Publication 15, (Circular E), Employer's Tax Guide, and Publication 15-A (PDF), Employer's Supplemental Tax Guide.  Also refer to Publication 1779 (PDF), Independent Contractor or Employee.
If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Generally, if you are an independent contractor you are considered self-employed, and should report your income (nonemployee compensation) on Schedule C (Form 1040) (PDF), Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Most individuals will need to pay self-employment tax (comprised of social security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040) (PDF), Self-Employment Tax, to figure the tax due.
Generally, there is no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you do not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Unlike independent contractors, employees pay social security and Medicare taxes, as well as income tax, through payroll deductions (withholding).

Additional Information:

• Publication 505, Tax Withholding and Estimated Tax
• Tax Topic 407, Business Income
• Tax Topic 762, Independent Contractor vs. Employee