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Temporary employee and independent contractor tax issues

 

Temporary employee and independent contractor tax issues

How do temp employees file their taxes, and how do you know when you are an independent contractor?

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

The economy might be improving, but there are still a lot of people who are pasting together their financial obligations through temporary, part-time employment and work by contract. In the six months leading up to July, 2013, temporary staffing agencies gained an average of 20,000 full-time equivalents on a monthly basis, which continued an upward trend that has been in place since the recession. Of course, 20,000 full-time equivalents could mean 30, 40, or 100,000 people being connected to part-time work via staffing agencies.

READ: Am I being taxed on my fringe benefit?

Part-time employment and temp agencies are taking an increasingly permanent role in the job market, but many people do not know the difference between part-time and full-time employment – at least as it relates to their taxes. One important question is:

How will I file my taxes at year-end when I am working for a temp agency?
The IRS differentiates between independent contractors and employees, but full-time and part-time employees often treat their taxes in the same way. As any type of employee, your taxes will be withheld from your paycheck and remitted by the business to the government. Your employer will also pay half your payroll taxes for you.

When working through a staffing agency, you are considered an employee of the staffing agency. The business you are working for is considered a client of the staffing agency, and you are providing services to the client. You can expect to receive your W-2 stubs in January with the amount you have been paid by the staffing agency, just as you would for a full-time employer.

READ: How does the Federal Insurance Contributions Act affect my taxes?

You might also work with a number of temp agencies and report multiple W-2s, but at least you do not need to file for each individual part-time gig.  

When am I working by contract, and when am I part-time?
Businesses are required to perform a number of services for employees but have much less obligations to their contractors. But there are substantial penalties a business will face if it misreports a business relationship.

An employer has the right to control or direct the means and methods of its employees, which lead to the end result of the work. With an independent contractor, a firm is only in control of the results of the work.

For example, an employer dictates when employees can work from the office, whereas a business can only provide a deadline to an independent contractor.

READ: What to do if the IRS challenges your tax returns

There are two exceptions to the contractor/employee divide, and these are statutory employees and statutory nonemployees. If you are a:

  1. Driver
  2. Full-time life insurance agent
  3. Full-time salesperson
  4. Direct seller
  5. Licensed real-estate agent
  6. Companion sitter, providing personal attendance, companionship or household care

Then you could be a statutory employee/nonemployee. See Publication 15-A, page 5-6 for more details.