When Your ‘Internship’ Makes You an Independent Contractor 645ih

By Samuel Handwerger, A, Faculty Advisor for TerpTax

Newswise — So, you’ve landed what looks like an awesome internship opportunity. The work sounds great, the company seems cool, and you’re excited to get some real-world experience. But then they hand you paperwork that says you’ll be working as an “independent contractor” instead of a regular employee intern. Hold up – what does that mean for you?

Let’s break this down because the difference between being an employee and an independent contractor isn’t just paperwork. It affects your taxes, your legal protections, and your wallet.

The Real Deal: Are You Actually an Independent Contractor?

First things first. Just because a company calls you an independent contractor doesn’t automatically make you one. The IRS has specific rules about this, and they don’t care what your paperwork says if the reality doesn’t match up.

In cool tax parlance this is known as the “substance over form” doctrine. Think of a duck that walks on four legs, barks like a dog and makes for a great pet around the house. You get the picture; that’s a dog and not a duck. So just because the paper says “independent contractor” does not make it so. It is not often a clear answer as one must weigh all the facts and circumstances to see what it adds up to. Here’s what the IRS looks at to determine if you’re truly an independent contractor:

Control and Independence

• Do you set your own schedule, or does the company tell you when to show up?
• Can you work from wherever you want, or do they require you to be in their office?
• Do you use your own equipment and software, or are you using theirs?
• Can you work for other companies at the same time?

Nature of the Work

• Is this work that’s central to their business, or is it a separate project?
• Are you doing the same type of work as their regular employees?
• How long is the relationship supposed to last?

Financial Arrangement

• Are you paid by the project or do you get a regular paycheck?
• Do you have the opportunity to make a profit or loss?
• Can you hire others to help you with the work?

If you’re showing up to their office every day, using their computer, following their schedule, and doing work that their regular employees also do— congratulations, you’re probably actually an employee, regardless of what the contract says.

The Tax Reality Check

Here’s where things get real: if you’re classified as an independent contractor, you’re going to owe a lot more in taxes than you might expect. As an employee, your employer automatically takes out federal income tax, Social Security, and Medicare taxes from your paycheck. They also pay the employer half of your Social Security and Medicare taxes for you. Nice, right?

But as an independent contractor, you’re on your own. You’ll need to pay:

• Estimated income tax payments to make up for the lack of withholding. Miss those payments, and you might face penalties.
• Self-employment tax, which covers both your portion AND the employer’s portion of Social Security and Medicare taxes

That self-employment tax alone is 15.3% of your earnings. So, if you make $5,000 during your internship, you’re looking at about $765 just in self-employment tax, plus whatever you owe in regular income tax.

Time for Some Real Talk with Your ‘Employer’

If you’re thinking “this doesn’t sound like a real independent contractor situation,” you might be right. And if that’s the case, you should probably have a conversation with your employer.

Here’s the thing— misclassifying employees as independent contractors isn’t just inconvenient for you; it can get the company in serious trouble with the IRS and Department of Labor. They could face penalties, back taxes and other legal issues. So, approach them professionally and ask some questions like:

• “I want to make sure I understand the working arrangement correctly. Will I be setting my own schedule and working independently on projects?”
• “Will I be able to use my own methods and tools to complete the work?”
• “Is this work something I could potentially do for other companies as well?”

If their answers make it clear you’re really going to be working like an employee, suggest they reconsider the classification. They should be consulting with their A, and so should you. Most legitimate companies will appreciate you bringing this to their attention.

Negotiating Your Rate (Because You’re Going to Need It)

If you are truly going to be an independent contractor, or if the company insists on that classification, you might consider negotiating a higher rate than you would as an employee.

, you’re now responsible for:

• The full 15.3% self-employment tax
• Making your own quarterly tax payments
• No benefits like health insurance or paid time off
• No workers’ compensation coverage
• No unemployment benefits if things don’t work out

A good rule of thumb is to ask for at least 25-30% more than what you’d accept as an employee. So, if you’d be happy with $15 per hour as an employee intern, you should be asking for around $20 per hour as an independent contractor.

Don’t be shy about this— explain that the higher rate s for the additional taxes and lack of benefits. Any company that legitimately wants to hire independent contractors should understand this.

The Silver Lining: Business Deductions

Okay, here’s some good news. As an independent contractor, you’ll file a Schedule C with your tax return, which means you can deduct legitimate business expenses. This can help offset some of those extra taxes.

You might be able to deduct:

• Home office expenses if you work from home (even if it’s just a corner of your dorm room)
• Transportation costs for business travel, even if using your own car.
• Equipment and supplies you purchase for work
• Professional development like courses, books, or conferences related to your work
• Internet and phone bills (the portion used for business)
• Professional hips or subscriptions

Keep good records and receipts for everything. The IRS likes documentation, and you don’t want to get caught making up deductions.

Protecting Yourself

Whether you end up as an employee or independent contractor, make sure you:

• Keep detailed records of all payments and expenses.
• Save money for taxes throughout the year (aim for 25-30% of your earnings).
• Get everything in writing, including scope of work, payment and deadlines.
• Consider getting your own liability insurance if you’re doing work that could potentially cause damage.
• Keep track of your hours and deliverables.

The Bottom Line

Being classified as an independent contractor isn’t necessarily bad – it can give you more flexibility and potential tax deductions. But it comes with real costs and responsibilities that many students don’t realize upfront.

The key is making sure the classification actually matches the reality of your work situation. If you’re really going to be working independently with control over how and when you do your work, then contractor status might work great. Just make sure you’re getting paid enough to cover the extra costs.

But if you’re going to be working like an employee – showing up at set times, using their equipment, following their processes – then you should probably be classified as an employee. Don’t let a company save money on taxes and benefits at your expense. , this is your career we’re talking about. It’s worth having these conversations upfront rather than dealing with a tax surprise later. And hey, navigating these kinds of professional situations is part of what internships are supposed to teach you anyway, right?

This article provides general information and shouldn’t be considered specific tax or legal advice. Tax situations can be complex, so consider consulting with a tax professional if you have questions about your specific situation. 

Samuel Handwerger is a full-time lecturer in the ing and information assurance department at the University of Maryland’s Robert H. Smith School of Business. He serves as faculty advisor to TerpTax, a nonprofit organization d with UMD that provides free tax preparation services for low to mid-income individuals in the University of Maryland, College Park community, according to VITA/TCE guidelines.