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(1) |
Three Key Factors for Determining Worker Classification
Determining whether a worker is an Employee or an Independent Contractor must be based on the specific facts and circumstances of each case. The determination is generally made based on the following three factors:
(a) Behavioral Control: Whether the business has the right to control how the work is performed. (b) Financial Control: Whether the business controls payment methods, expense reimbursement policies, and whether tools or materials are provided.
(c) Type of Relationship: Whether there is an employment contract, whether employee benefits are provided, and whether there is an intention for an ongoing employment relationship.
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(2) |
Tax Filing Requirements
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(1) |
Statutory Employees
For statutory employees, employers generally issue Form W-2 and check the “Statutory Employee” box in Box 13. Employers are required to withhold and pay Social Security and Medicare taxes but may not be required to pay FUTA.
For individual income tax filing, statutory employees report this income on Schedule C (similar to self-employed individuals), but are not required to file Schedule SE (since Social Security and Medicare taxes have already been withheld by the employer).
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(2) |
Statutory Nonemployees
Statutory nonemployees are compensated based on sales rather than working hours, and services must be provided under a written contract (which must explicitly state that the service provider is not an employee). Companion care providers who are not employed by a companion care agency are generally treated as self-employed, unless the service recipient has the right to direct and control their work.
Statutory nonemployees typically receive Form 1099-NEC. The taxpayer must then report this income on Schedule C of their individual tax return.
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(1) |
Parent Employing a Child
When a sole proprietor or a Qualified Joint Venture employs their own child, wages are subject to federal income tax withholding (Federal Income Tax) under normal rules. However, Social Security tax (Social Security) and Medicare tax (Medicare), as well as FUTA (Federal Unemployment Tax), may be exempt depending on the child’s age:
Note: If the business is a C Corporation or S Corporation, these exemptions do not apply. |
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(2) |
Employing Spouse
When a spouse works for the other spouse’s sole proprietorship, wages are subject to federal income tax, Social Security tax, and Medicare tax, but FUTA is exempt. If the business is a corporation or partnership, all applicable taxes must be paid.
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Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage. |
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