Simple Guide to
Employee vs Independent Contractor

It's important to correctly determine whether the individuals providing services are employees or independent contractors.  The problem can come during an IRS audit of the business.  If the IRS determines that a person providing services is really an employee and not an independent contractor there can be serious consequences.

• An employee is generally considered to be anyone who performs services if the business can control what will be done and how it will be done.  What matters is that the business has the right to control the details of how the worker's services are performed.


• works under a company's control (how, when, where)
• gets a W-2, receives benefits, and
• has employment taxes withheld,


• Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public. Doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers are generally independent contractors.


• runs their own business
• controls their work
• uses their own tools
• gets paid via 1099
• pays their own employment taxes, and
• works project-to-project.

The key difference is the degree of control over the work ... the more control over the worker the more likely it is that the IRS will classify the worker as "employee"

Employee

• Control:  The business directs how, when, and where work is done (e.g., set hours, methods).
• Financial:  Company reimburses expenses, provides tools, withholds taxes (W-2 issued).
• Relationship:  Often continuous, integral to the business, receives benefits (insurance, paid leave).

Independent Contractor (IC)

• Control:  Works independently, sets own hours, uses own methods, offers services to the public.
• Financial:  Pays own expenses, can profit/lose, receives Form 1099 (no tax withholding).
• Relationship:  Project-based, not integrated into the core business structure, no benefits.

Key Questions to Ask

• Behavioral:  Does the business control the worker's daily tasks and methods?
• Financial:  Does the worker invest in their own equipment, have unreimbursed expenses, or have a chance for profit/loss?
• Relationship:  Is the relationship ongoing, or project-based? Are there contracts or benefits?

Disclaimer:  Worker classification has significant tax and legal implications, so it's wise to consult IRS guidelines or a legal professional for complex situations.