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Employee or Independent Contractor: How to Tell the Difference

Every business depends on numerous individuals who help to ensure its growth and success. While many of these people may be actual employees, often a business may hire an independent contractor to fulfill a specific need for the company.

Independent contractors may provide general labor, administrative work, or any other service imaginable, but they are not treated as employees, nor do they receive the typical benefits associated with employment. Likewise, the business who hires them has different tax responsibilities for its employees than for an independent contractor.

Given the different taxation and the possibility of having an issue with the IRS, it is important to classify employees and independent contractors accurately. The IRS is a bit vague in defining an employee, but there are 3 Common Law Rules that should make it easy to distinguish who is an employee and who is merely contracting their services to the business. Thinking about the following questions should help clarify a worker’s status.

Does the employer control how the worker does his job?

The first thing to consider is the degree of independence a worker has. When an employer is able to direct most aspects of how a worker does his job, the worker is likely an employee. Independent contractors fulfill their duties, but the employer only has influence over the end result and not the process or decisions a worker makes to achieve those results. An example of this is a freelance graphic designer who will provide the website design the employer chose, but who will create that website without any input on how he does it. If an employee is creating a website, the employer can determine the steps involved, software used, and hours dedicated to the task.

Who controls the financial aspects of the worker’s job?

A second area to weigh is the degree to which the worker is responsible for expenses, supplies, and any other administrative costs of performing the work. An employee is typically reimbursed for any expenses associated with job duties and is often supplied all necessary materials. An independent contractor typically includes such costs into their price rate and considers these his operating costs.

Is this a contractual relationship?

Another important area to examine is whether or not contracts exist between the employer and the worker. Is the job supposed to last indefinitely, or is the worker providing a service by a specific deadline? Independent contractors are hired for a specific duration which usually comes to an end upon project completion. Employees typically have more job security since they are usually hired with the expectation to stay with the company. Employees also typically receive benefits independent contractors do not, such as pension, health care, paid vacation time, and paid sick days.

Of course, there may be times when the lines are so blurred between the work typically done by an employee and that of an independent contractor that a business may be unable to adequately identify who qualifies as a true employee. For such cases the IRS has Form SS-8, which allows them to step in and determine the status of a worker. Be forewarned that they can take up to 6 months to do this.

While it can seem like a minor detail, proper classification of workers is paramount to ensuring a business fulfills IRS requirements. Failure to do so can result in tax penalties and can also cause taxation issues for the worker involved. Following the IRS guidelines and reaching out for their help are two ways to ensure a business is always in compliance.

Need help determining your workers’ status to avoid unpaid taxes? Contact us today to learn how we can help with this and all your tax needs.


This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided in this website is not all inclusive and such information should not be relied upon as being all inclusive.