Are you an independent contractor or an employee

independent contractor or an employee before KRA
Last updated  Jan 5, 2023

Are you an independent contractor or an employee before KRA?

It's a question that may seem straightforward, but the answer can have significant tax implications for both you and your employer.

Understanding the difference between independent contractors and employees is crucial, as misclassifying a worker can lead to serious consequences for both parties. While it may seem tempting for a business to classify a worker as an independent contractor in order to save on employment taxes, this can lead to serious legal and tax problems if the worker is later reclassified as an employee by KRA.

So, how do I determine whether a worker is an independent contractor or an employee? 

There are several factors that are used to determine whether a worker is an independent contractor or an employee. These include:

  1. The degree of control the employer has over the worker's duties and responsibilities: Employees typically have a set job description and are told how to perform their duties, while independent contractors have more control over how they perform their work.

  2. The worker's ability to work for multiple clients or companies: Independent contractors are generally able to work for multiple clients or companies, while employees are typically restricted to working for just one employer.

  3. Whether the worker is provided with benefits: Employees are usually entitled to benefits such as health insurance, vacation pay, and retirement plans, while independent contractors are not.

  4. Whether the worker is considered a vital part of the company: Employees are typically considered a vital part of the company, while independent contractors are not.

  5. The length of the working relationship: Independent contractors are usually hired for a specific project or period of time, while employees are typically hired for an indefinite period.

  6. Whether the worker is paid on a regular basis: Employees are usually paid on a regular basis (e.g. weekly or monthly), while independent contractors are typically paid per project or on a fee basis.

  7. Whether the worker is required to complete training: Employees are typically required to complete training, while independent contractors are not.

  8. The worker's ability to set their own schedule: Independent contractors typically have more control over their schedule and can choose when and where they work, while employees are required to follow a set schedule.

In general, independent contractors are self-employed individuals who are responsible for their own taxes and benefits. They are typically hired to complete specific tasks or projects and have the freedom to determine their own work schedule and methods. On the other hand, employees are considered to be under the control and direction of their employer and are entitled to certain benefits such as overtime pay and unemployment insurance.

Misclassifying a worker as an independent contractor can have serious tax implications for both the business and the worker. If a worker is reclassified as an employee by KRA, the business may be required to pay back taxes, fines, and penalties. The worker may also be required to pay back taxes on any income that was not properly reported.

On the other hand, being classified as an employee can have its own set of drawbacks for independent contractors. If you an independent contractor is reclassified as an employee by KRA, you loose the right to deduct operating expenses from your income. You therefore end-up paying higher taxes.

Conclusion

In conclusion, it's important to carefully consider the factors that determine whether a worker is an independent contractor or an employee. Misclassifying a worker can have serious tax implications for both the business and the worker, and it's important to accurately classify workers in order to avoid legal and tax headaches down the line.


Written by Joseph Wachira
The author is a tax senior consultant and can be reached via 
wachira@cleartax.co.ke

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