How do I decide who is an employee & who is an independent contractor?
Deciding who is an employee and who is an independent contractor is a decision that a business should make. Because of the complexity, I recommend getting input from a CPA or attorney experienced in such matters. It is not one that can be made just because it will avoid payroll taxes or because issuing a 1099 makes the administration of the business simpler. The consequences of assigning the wrong classification can be very costly. IRS guidelines for making a good decision are based on the following common law rules. Notice that control is a major factor.
Behavioral control factors
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Does the company control or have the right to control what the worker does and how the worker does his or her job?
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Type of instructions given
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Degree of instruction
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Evaluation systems
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Training
Financial control factors
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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.).
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Significant investment
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Unreimbursed expenses
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Opportunity for profit or loss
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Services available to the market
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Method of payment
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Type of relationship
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Are there written contracts or employee type benefits such as a pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?
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Written contracts
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Employee benefits
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Permanency of the relationship
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Services provided as key activity of the business
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Other things to consider
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Not all states use the IRS criteria. Be sure to check your state's rules to make sure you are in compliance.
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Also read
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