How to Distinguish Between an Employee and an Independent Contractor

A worker whom you pay in the course of your trade or business could be an employee or a contractor. You must pay employment taxes for an employee.

Difficulty:

Moderate

Instructions

Things You'll Need

• Business Books
• Contracts
• File Cabinets
• EIN
• Business Services
• Calendars
• Manila File Folders
• Office Software
• Spreadsheet Softwares

1. Consider whether you control how the worker does the work. Did you provide training for the worker? Is the worker required to follow your instructions on when, where and how to do the work? If you have the right to control work behavior, then the worker is probably an employee.

2. Find out if you provide benefits to the worker. If you give health insurance, sick pay, vacation pay, a pension plan or other benefits, the worker is an employee.

3. Determine if the worker's services are a continuing and integral part of your trade or business. A worker who holds a permanent position that is fundamental to your business is generally an employee.

4. Ask yourself if you have the exclusive right to the worker's services. When a worker is not available to work for other people or businesses, he or she is usually an employee. This rule does not apply to commissioned salespeople.

5. Determine whether you are providing all the materials, equipment and facilities the worker requires and whether you reimburse him or her for expenses. If so, the worker is probably an employee.

6. Ask yourself if the worker was hired for a specific project for a limited time. Is the worker required to complete the project before he or she can quit? If so, the worker is probably a contractor.

7. Find out if at least 25 percent of the businesses in your field treat similar workers as independent contractors. This percentage generally indicates independent-contractor status.

8. Determine if the worker sets his or her own hours, decides the order and timing of projects and controls how the work is done. If this is the case, the worker is probably a contractor.

9. Determine if the worker is paid by commission for the sale of consumer products or real estate. Such a worker is an independent contractor.

Tips & Warnings

• Since it is cheaper and easier for you to classify the worker as a contractor, you can, in some cases, take steps to make it so. The worker should bill you for his or her work. A written agreement or contract that says the worker is an independent contractor is best. Even with that, you need to give the worker independence about where, when and how the work is done. Let the worker be responsible for his or her own training, transportation, equipment and materials.

• The IRS has reclassified as employees nearly a half million workers who were once considered independent contractors. If you don't have a strong argument for making someone a contractor, you could be subject to considerable taxes, penalties and interest if it is determined that a worker is an employee. The IRS will treat you more leniently if you have a reasonable basis for believing that the worker is a contractor.