A Virtual Assistant (VA) is an Independent Contractor. As a small business owner you might think, “the VA is ‘employed’ by me.” You may think, “but I ‘hired’ my VA.” Terminology may be loosely used but following the letter of the law regarding Independent Contractors is key.
What’s the difference?
The Internal Revenue Service (IRS) states, “It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.”
When You Are an Employee…
- Your employer must withhold income tax and your portion of social security and Medicare taxes. Also, your employer is responsible for paying social security, Medicare, and unemployment (FUTA) taxes on your wages. Your employer must give you a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from your pay.
- You may deduct unreimbursed employee business expenses on Schedule A of your income tax return, but only if you itemize deductions and they total more than two percent of your adjusted gross income.
When You Are an Independent Contractor…
- The business may be required to give you Form 1099- MISC, Miscellaneous Income, to report what it has paid to you.
- You are responsible for paying your own income tax and self-employment tax (Self-Employment Contributions Act – SECA). The business does not withhold taxes from your pay. You may need to make estimated tax payments during the year to cover your tax liabilities.
- You may deduct business expenses on Schedule C of your income tax return. (Ref: https://www.irs.gov/pub/irs-pdf/p1779.pdf)
In order to aid employers in determining whether a worker is an employee beyond the Common Law Test, the IRS has established 24 factors to consult for further clarification. The following chart is a comparison of the 24 factors based on employee attributes contrasted against those of an independent contractor. (Ref: http://www.hrsbdc.org/legal-issues/employee-or-independent-contractor/)
|Must comply with employer’s instructions about when, where, and how to work||Determines place and sequence of work|
|Trained by employer||Train on their own|
|Services are part of business operations||Services may not be related to employer’s services|
|Work done personally||Others can do work if the contract is completed|
|Has assistants hired by employer||Employs own assistants|
|Has continuous relationship with employer||Work by the job|
|Work hours set by employer||Sets own hours|
|Works full-time for one employer||Services offered to the public|
|Work done on employer’s premises or designated site||Generally works off-site|
|Must follow set order of work||Can set own schedule|
|Submits regular reports||Files report when job ends; interim reports possible|
|Paid by the hour or salary||Paid by the job|
|Business and travel expenses paid by employer||Pays own business and travel expenses; part of cost of job|
|Tools and equipment paid by employer||Furnishes own tools and equipment|
|Has no investment in facilities used||Has significant investment in facilities used|
|No profit or loss incurred||Can make a profit or suffer a loss|
|Works for one firm at a time||Works for several companies at one time|
|Services are not generally available||Makes services available to general public|
|Can be fired at any time||Cannot be fired if results satisfy contract|
|Can quit at any time without liability||Must complete job according to contract specifications|
|The firm has filed a W-2 for the worker in the past||Never considered an employee|
|The employer’s and individual’s intent||A contract for the work to be completed|
|Regular payments for work (weekly, monthly)||Payment at completion of the job|
|An unincorporated worker||An incorporated worker|
Need further information? Consult with your tax professional.