A short guide on how to determine if you are employed as a salaried person or freelance contractor
The answer to the title may seem obvious to a lot of people, but there is a sizeable section of the population that is confused if they are salaried or contractor.
This is especially true when overseas employers are involved and the contract is for fixed monthly payments and/or the contract allows you similar terms as you would get in job.
It is also important to briefly discuss why this discussion is necessary. Being a contractors(and having gross receipts of Rs. 75 lakhs or less, typically) means you can declare 50% of your gross receipts as expenses. In other words, you only pay taxes on 50% of your revenue from the engagement. Of course, this is important.
###Here are a few ways to determine the same for individuals working for Indian clients/employers:
1. You should look at your 26AS to see the section under which your TDS is being deducted. If the section is not 192 or 192A, it means you are not a salaried employee for your client. Typically, the TDS for freelancers/contractors is deducted under section 194J or 194C. THIS IS THE MOST RELIABLE WAY TO DETERMINE THE EMPLOYMENT STATUS.
2. Is your employer/client giving you the option to open an EPF account for you? If not, it is possible that you are a contractor for them.
3. Do you get form 16 or Form 16A? Form 16(including form 16 Part A and Form 16 Part B) are the TDS forms that can only be issued to employees, while form 16A is issued to all vendors except for employees.
Usually terms like paid time off, perks can be an unreliable metric for you to determine if you are an employee or a contractor and the same have not been covered here. It should also be noted, that the HR of the company can also help you determine your employment status.
###Here are a few ways to determine the same for individuals working for Foreign clients/employers:
1. Are you being employed through any employer of record that your client has in India? If yes, you are probably an employee for them.
2. You should look at your 26AS to see the section under which your TDS is being deducted. If the section is not 192 or 192A, it means you are not a salaried employee for your client. Typically, the TDS for freelancers/contractors is deducted under section 194J or 194C. THIS IS THE MOST RELIABLE WAY TO DETERMINE THE EMPLOYMENT STATUS.
3. In scenarios where no TDS is being deducted, despite your contract income being taxable, it is highly likely that you are a direct contractor for the foreign client and not an employee.
Determining the status with regards to foreign clients can be confusing as the wording of contracts and the HR pitch can be geared towards making you feel like an integral part of the company. However, the law does not look at perks like paid time off, fixed payments to determine your taxability status as there is no restriction to the same being offered to contractors.
Hence, the most reliable way to determine your employment status is to check if any TDS is being deducted on your employment with the foreign client. If not, you are a contractor and you may be eligible to pay taxes on only 50%/6% of your total revenue.