Ronald Arthur Stearns Sr. PLLC
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How is my employment status relevant to my tax bill?

Paying taxes is complicated enough, but ensuring one is paying their taxes at the right status of worker can be even more complex. It is a common error made by businesses-intentionally or mistakenly misclassifying the status of a worker only to end up paying heavy penalties. The relationship between an employer and employee is important to understand because it determines which party will withhold taxes and which taxes are going to be withheld.

Texas residents may be aware that the IRS tax law defines an employee or an independent contractor using common law principles. While previously 20 factors were used to determine the status of one's employment, they have been condensed down to three basic elements-behavioral control, financial control and relationship of the parties. This means the IRS looks at issues such as who provides actual directions to the employee, their training, hours of work, order of performance, method of payment, tools and materials used and the right to discharge among other factors.

Employers of employees must pay certain federal taxes and also collect them from their employees, both federal and income. FICA taxes are also withheld from employees and paid to the federal government. The status of the a worker determines who is paying FICA taxes-independent contractors do not have any taxes withheld from their wages, as they receive gross sums. Instead, they pay self-employment taxes.

Understanding one's tax obligations can become complicated, especially when trying to determine if an individual is self-employed or an independent contractor. Since these determinations are very important, consulting an experienced attorney for guidance can be beneficial in ensuring all legal responsibilities are being fulfilled.

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