As a mystery shopper, you are an independent contractor and not an employee of the mystery shopping companies you provide services to. As an independent contractor, the companies you provide services to are not required to withhold taxes from your compensation. They do not pay unemployment insurance, workers compensation insurance, or take social security withholdings on your earnings. You are not eligible to receive any tax-free benefits from the company.
Is all of this confusing to you? Well, you are not alone. There are countless publications and explanations on the subject. It can be daunting. To simplify matters for you, the US Department of Labor and the Internal Revenue Service have put together some guidelines to help explain the distinctions.
For federal tax purposes, common law rules are used to determine whether a worker is an independent contractor or an employee. There are three categories that should be examined to determine a worker’s status: Behavioral Control, Financial Control, and the Relationship of the Parties.
According to the IRS (Topic 762):
Behavioral Control refers to the degree of control a company exercises over what work is accomplished and how the work is done, through instructions, training, or other means. As an independent contractor, you have control over what assignments you accept. As long as you get the job done you have a lot of control about how and when you complete those assignments.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:
- The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees.
- The extent of the worker’s investment in the facilities or tools used in performing services. However, a significant investment is not necessary for independent contractor status.
- The extent to which the worker makes his or her services available to the relevant market. As a mystery shopper, you are free to make your services available to other mystery shopping companies and to seek out other business opportunities.
- How the business pays the worker. Independent contractors are often paid on a flat fee basis rather than an hourly basis, and receive a 1099 each year.
- The extent to which the worker can realize a profit or incur a loss.
- Written contracts describing the parties’ intent in creating the relationship. This can be significant if you are having difficulty determining worker status through other means.
- Whether the business provides the worker with benefits, including insurance, a retirement plan, and vacation and/or sick pay. Independent contractors do not generally receive benefits or paid leave.
- How permanent the relationship between the parties is. You are free to accept or decline shops and are under no obligation to accept any future shops unless you have already committed to perform them.
- The extent to which the work performed is a key aspect of the company’s regular business. (Of course this is just one aspect of the process).
You should receive a Form 1099 from each company you provide independent contractor services to throughout the year. It is important to keep accurate records to track your income and expenses, mileage, or any other expenditure associated with your mystery shopping business. You may deduct business expenses on Schedule C of your income tax return. For tax purposes, you are considered to be self-employed. Independent contractors are responsible for paying their own income tax and self-employment tax (Self-Employment Contributions Act – SECA). The mystery shopping company does not withhold taxes from your pay. You may need to make estimated tax payments during the year to cover your tax liabilities.
For more information about filing your taxes as an independent contractor, see our previous article Reporting Mystery Shopping Income. You can download and print IRS publications, forms, and other tax information on the Internet at www.irs.gov or call the IRS at 1-800-829-3676 (1-800-TAX-FORM) to order free tax publications and forms.
Now that you know the basics, I hope you have a better understanding of what it means to be an independent contractor. You have the flexibility and freedom to choose assignments that are convenient, interesting, and the most profitable for you. You do not punch a time clock; as long as your shops and reports are submitted by the due date, you choose when and how to best schedule your time. What could be better if you want to make some extra money but don’t want to go in to an office every day! Mystery shopping is a great option and the opportunities are growing every day so get out there and make some extra money.