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

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

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.