Tax Issues 6
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In summary, if you look like you are an employee (work a regular schedule in the client's office and never work for anyone else), chances are the IRS would call you an employee if you or the company was ever audited.
What about programmers and others who take on long-term contracts on government or other projects requiring work be done on-site? Does the IRS consider them employees or contractors?
Many such occupations fall into a category the IRS calls "technical service specialist," which is defined as an individual who is an engineer, designer, draftsman, computer programmer, computer systems analyst, or in a similar line of work. These technical service specialists are considered employees if they are working under contracts arranged by a third party such as a job shop or temporary employment agency. .
The IRS says, however, that the designation technical service specialist doesn't automatically doom someone to be an employee. Someone considered a technical service specialist can be an independent contractor if he or she contracts directly with the client firm and doesn't appear to be an employee based on the criteria described above.
What happens if the IRS says I'm an employee?
A company that wrongly classifies you as an independent contractor would have to pay unemployment taxes on your earnings and might also be liable for a penalty of 100 percent of the tax they didn't withhold. You would lose any home office deductions and deductions for payments to pension plans. Business deductions would have to be reported on Schedule A rather than Schedule C and would thus be subject to the 2 percent limitation on miscellaneous deductions.
What taxes do I have to pay when I work for myself?
You have to pay federal income tax and, if your profits from self-employment amount to more than $400 for the year, self-employment tax. You may be liable for state and local income taxes as well.
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