How do I decide who is an employee and who is an independent contractor?
Deciding who is an employee and who is an independent contractor is a decision that a business should make. 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
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
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.)
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?
Permanency of the relationship
Services provided as key activity of the business
Other things to consider
Not all states use the IRS criteria. Be sure to check your state's rules to make sure you are in compliance.
Also read Employees vs. independent contractors