Is it worth checking your employment status for tax?

Check employment statusChecking your employment status is a common topic of conversation for contractors. For tax purposes, defining which box you fit into is important. It could help you avoid the unnecessary costs associated with the latest changes to IR35.

Last April’s IR35 reforms mean you could be liable to pay extra tax, professional fees, interest and penalties if you can’t prove you’re self-employed. In this post, we take a look at the five different employment statuses to help you decide which applies to you.

Employee

A worker who works under an employment contract is generally deemed an employee. As an employee, you will have access to various benefits including statutory sick pay, time off for emergencies, statutory maternity or paternity leave, holiday pay, and statutory redundancy pay. You will also be protected against unfair dismissal, be permitted to serve minimum notice periods prior to dismissal, and be able to request flexible working arrangements.

Employees are expected to work a minimum number of hours as per their contract, are paid for overtime, cannot send another individual to fulfil their role on their behalf, and work at the business premises of their employer. The tax and National Insurance obligations of employees are fulfilled by their employer. If you hold at least £2,000 worth of shares in your employer’s company, you will be classed as an employee shareholder. Employee shareholders have the same employment rights as both workers and employees.

Worker

Workers are often mentioned in the same breath as employees, but there are key differences. Sonia Wilson from HR advice portal Populo has some words of wisdom regarding the definition of a worker:

“If someone does casual or irregular work for you and most of the statements below apply to them, it is likely they are a worker:

  • They occasionally work for you.
  • You do not have to offer them work and they do not have to accept it – they only work when they want to.
  • Their contract with you uses terms like ‘casual, freelance’, ‘zero hours’, ‘as required’ or something similar.
  • They had to agree with your terms and conditions to get work (either verbally or in writing).
  • They are under the supervision or control of a manager or director.
  • They cannot send someone else to do their work.
  • You deduct tax and National Insurance contributions from their wages.
  • You provide materials, tools or equipment they need to do the work.”

Those completing casual, agency, freelance, seasonal or zero hours work are classed as workers. Workers are entitled to selected employment rights, such as National Minimum Wage and holiday pay, so defining your status could be particularly beneficial.

Director

Defining your status as a director is much more straightforward than identifying as a worker. Directors run limited companies and do so on behalf of shareholders. If your role as a director extends to other duties and you hold an employment contract, you will be entitled to selected employment rights.

Office holder

Office holders have appointed positions within companies, but do not hold an employment contract or receive payment on a regular basis. Registered company directors or secretaries, board members of statutory bodies, clergy members, trustees, trade union secretaries and treasurers, or individuals appointed by the crown are deemed office holders.

Contractor

A self-employed person or contractor runs their own business, and processes their own tax and National Insurance Contributions. As a result, they don’t have the same employment rights or benefits as employees. Contractors and the self-employed do have rights in regards to protecting them against discrimination and safeguarding their health and safety. The rights and responsibilities of a self-employed person or contractor are generally stipulated in the contract they hold with their client.

There are differences between contractors, subcontractors and the self-employed, many of which are described in this guide.

Checking your employment status

If your employment status isn’t correctly defined, you could be liable for unpaid tax and penalties. There are various tools available for checking your employment status, including HMRC’s very own Employment Status Indicator.

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