How do I determine whether the individuals providing services are employees or independent contractors?
Deciding who is an employee and who is an independent contractor is a decision that a business must make; but, it is not one that can be made arbitrarily. The consequences of assigning the wrong classification can be very costly. The IRS uses as guidelines the following common law rules.

Behavioral Control Factors
  • Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Type of instructions given
  • Degree of instruction
  • Evaluation systems
  • Training
Financial Control Factors
  • Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Significant investment
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment
Type of Relationship
  • Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business
IRS Resource:
Type of Relationship