 Hello and welcome to the session in which we will discuss the differences between an employee and an independent contractor. When you work for a company, when you work for someone most of the time you're going to know your status. If you're an employee you'll get a paycheck every two weeks or one week or a month and at the end of the year you get a W2. If you are in an independent contractor what's going to happen is this they're going to pay you a certain amount of money in a form of a check without any deduction and at the end of the year they give you a 1099 telling you how much you received in total and you are responsible for paying your taxes. Therefore it's crucial for tax purposes and compliance with labor laws to know whether you are an employee or an independent contractor. Now 99% of the time you're aware of your status. However, misclassifying a worker, some companies what they do they have technically an employee they classify them as an independent contractor can lead to tax deficiency they're responsible for paying certain taxes it could lead to paying interests penalties and could have legal consequences. What are some of the differences if you have an employee versus an independent contractor? Unlike employees if you're an independent contractor you're not eligible for fringe benefits provided by the employer like group group insurance retirement plans also self-employed individuals avoid paying payroll costs associated with FICA and food taxes so the employer your company is not responsible for that therefore they save money therefore the IRS is aware of these benefits benefit in a sense the misclassifying employee as an independent contractor therefore you need to know the rules between employee and independent contractor. Now why do we need to know the rules for our purposes? Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today. Well there are certain business expenses that applies differently whether you are self-employed or an employee. I'm gonna list them now I'm gonna will discuss each one of them separately one of them is transportation, travel, moving, entertainment, education, office in the home and miscellaneous expenses. Whether you are an employee or self-employed you would treat those expenses differently and it will make a difference to your bottom line. Simply put the distinction will have implication for both the business as well as the individual. Self-employed individuals what they can do if you are considered an independent contractor self-employed you can deduct those expenses on schedule C form 1040. As business expenses you're just having a business and that's part of your business necessary and ordinary expenses. If you are an employee you will be and this is this deduction is for AGI on schedule C4 AGI. If you are an employee you will deduct those expenses as miscellaneous itemized deduction from AGI in between 2018 and 2025 those deductions are suspended simply put you cannot take them. So most employees are classified as common law as common law employees. Simply put when you have an employee how do you know you have an employee? Well there are certain common law employee rules which we're gonna look at these factors determined by factors such as behavioral control financial control and relationship between the parties. Let's go over some of these rules just to get an idea to determine whether someone is an employee or an independent contractor. The IRS have those rules and basically one of them is behavioral behavioral control. Does the business control control means have the right to control what the worker does and how the worker perform their job? What facts do they look at when they determine this? Well does the business tell the employee when where and how to work? If you're telling someone when where and how to work then that individual is an employee. The type of the equipment the employee is using are you providing that the equipment are they providing their own equipment? Usually if you're providing the equipment they're usually an employee if they're providing their own equipment they're an employee. Think about you hired someone to paint your home or if you hire someone to paint your home they're gonna tell you they can they can show up at 9 a.m. or they can show up at 7 p.m. You cannot tell them you cannot force them when to show up. They're gonna provide their own equipment and tools most likely that painter is a self-employed as it's not an employee and for example this individual that's painting your home they might hire someone to help them. They hire someone you have nothing to do with that. Well most likely their independent contractor where they purchase their supplies and their services they choose that if they choose that most likely their independent contractor. Okay what work must be performed? If you're telling someone what work must be performed and they cannot do something else then their employees if they can do any work they would like to they're self-employed. What order or or sequence to follow in performing the work what type of training they're getting those are all factors in determining whether you are an employee or self-employed and obviously you know the answer if the answer is you do whatever you want to you are an independent contractor and an employee normally received training to perform work in a particular manner a self-employed individual they get their own training so behavioral control now keep in mind when the IRS looks at those look at everything evaluate way everything then they look at the financial control financial control is how are you being paid the extent to which the worker has unreimbursed business expenses do you reimburse do you give them do you reimburse them for business expenses or do they absorb that and consider the business expense if you reimburse them for certain business expenses they're more like an employee but if you just give them you know a certain amount of money for their effort and they paid their own expenses their independent contractor the extents of workers investment well think about it if they bought a truck if they bought equipment or they're invested in their work the extent to which the workers make services available to a larger market well if they service you if if they paint your home and they paint 15 other homes then they're not your employees they're they work for multiple customers their independent contractor how do you pay them are they paid the same or as other individuals or are they paid differently is the worker realizing a profit or a loss from this endeavor if they're realizing a profit or a loss that means they are employee they are contractors they are not employees because employees get wages the relationship between the two parties is a third factor a common law factor the main one is do you have a contract okay variety of facts such as a written contract describing the relationship usually a written contract is a good way to start but you could have a written contract and the relationship could be different so written contract is not only the only thing but it's a starting point but you have to really see how they are acting describing the relationship whether the worker is provided with employee type fringe benefit they should not be if they're not employee they should not qualify for fringe benefit what type of a relationship is it permanent or is it indefinite if someone if you're working for a company on a permanent basis then you're an employee but if you're working for them for a project for a period of time then you're leaving go and working for someone else you're a contractor you're independent contractor self-employed how integral the services are to the principal activity of the business what are they doing for you are they doing something on the side a one-time project or they are basically running your business on a regular basis that also matter so what they do the IRS look at all these factors financial control behavioral control what type of a relationship written relationship or or actual relationship in in order to evaluate if that comes up now we have another class of employees they're called statutory employees and those are kind of a little bit different they don't meet the criteria for common law employees nevertheless for employment purposes they are still treated as employee for employment tax purposes this is a special group of individuals let me list them for you then you'll get an idea what i'm talking about license real estate agent life insurance sales agent these individuals what they do they work for one company usually they work for one company one company but what they do they incur expenses to market their to market their work for example a real estate agent you might work for one agency all the time all the time constantly but you run your own business within that agency so are you an employee or are you a are you self-contractor well there's a category called a statutory employees certain delivery jobs home workers and other sales people direct sellers what are some features of statutory employees well service performed by the employee as an employee you are performing the work the service to generate the revenue you don't have a large investment in equipment or accommodation maybe they let you use their office that's fine but you don't have a large investment and there's an ongoing relationship and that's why it it's it's different it's not employee it's not an independent contractor you can have doing your own work but for one company ongoing relationship with employees there's an ongoing relationship between the agency and the employees you have to know they can deduct this group of employees they can deduct their expenses on schedule say for a GI okay while they're not subject to federal income tax withholding they are subject to social security tax so kind of it's it's it's weird but they are considered independent contractor again this is more payroll payroll laws we don't get into that just FYI if a taxpayer is uncertain about their status they could always file an ss8 determination of worker status for purpose for federal employment tax and income tax withholding to request and they will tell you whether you should be an employee or an independent contractor if you don't really know your status but usually you should know your status now again why are we learning about all of this the reason we're learning about all of this too differentiate between an employee an independent contractor why do we need to do that because there are certain expenses the way we treat them okay for self-employed individual is different than an employee simply put self-employed individual those deductions are for agi usually they go on schedule c for employee they are deducted from agi and they are on schedule a as as as itemized deduction and remember between 2018 and 2025 if you're an employee and incurring those deductions you cannot take them anyhow we're going to look at each deduction separately to determine how it's being treated for as you are an employee or as an independent contractor what should you do now go to farhat lectures look at additional mcqs that's going to help you understand this important topic good luck study hard invest in yourself whether you are a cpa candidate enrolled agent or an accounting student invest in yourself and stay safe