Independent Contractor vs. Employee

Behavioral Control

1. Types of instructions given - An employee is generally subject to the business's instructions about when, where and how to work. Examples of types of instructions about how to do work include: 
   
1. When and where to do the work.
   
2. What tools or equipment to use.
   
3. What workers to hire or to assist with the work.
   
4. Where to purchase supplies and services.
   
5. What work must be performed by a specific individual.
   
6. What order or sequence to follow when performing the work.
   
2. Degree of instruction - Degree of instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely to be an independent contractor.
   
3. Evaluation system - If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. On the other hand, if the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
   
4. Training - If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is a strong indicator that the worker is an employee. Periodic or on-going training about procedures and methods is an even stronger indicator of the employer/employee relationship. Typically, independent contractors would use their own methods.
   

Financial Control

1. Significant investment - An independent contractor often has a significant investment in the equipment or tools used in working for someone else. However, in many occupations, such as construction, workers spend money on the tools and equipment they use and are still considered to be employees. There isn't a dollar limit that must be met in order to have a significant investment. Also, a significant investment is not necessary for independent contractors as some types of work don't require large expenditures.
   
2. Unreimbursed expenses - Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their employer. 
   
3. Opportunity for profit or loss - If a worker has a significant investment in the equipment and tools used and if the worker has unreimbursed expenses, they have a greater opportunity to lose money with their expenses exceeding their income. Having the possibility of incurring a loss indicates that the worker is an independent contractor. 
   
4. Services available to the market - An independent contractor is generally free and able to seek out business opportunities. Independent contractors often advertise their services, maintain a visible business location and are available to work in their relevant field. 
   
5. Method of payment - An employee is generally guaranteed a regular wage by their employer. This typically indicates that a worker is an employee, even if the wage is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job performed. However, it is common in some professions to pay an independent contractor by the hour.
   

Type of Relationship

1. Written contracts - A written contract stating that a worker is an employee or an independent contractor isn't sufficient to determine the worker's status. The IRS isn't required to follow a contract stating that the worker is an independent contractor. How the parties work together determines whether the worker is an employee or an independent contractor.
   
2. Employee benefits - Employee benefits include things like insurance, pension plans, retirement plans, paid vacation, sick days and disability insurance. Businesses generally don't grant these benefits to independent contractors. However, the lack of these types of benefits doesn't automatically mean the worker is an independent contractor. 
   
3. Permanency of the relationship - If you hire a worker with the expectation that the relationship will continue indefinitely, this is generally considered evidence that the intent was to create an employer/employee relationship. The relationship with an independent contractor is usually for a specific project or period of time. 
   
4. Services provided as key activity of the business - If a worker provides services that are a key aspect of the business, it's more likely that the business will have the right to direct and control their activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as it's own and would have the right to control or direct that work. This would indicate an employer/employee relationship.
   

Still Unsure?

Consequences of Misclassifying Employees

1. Back wages and benefits - Employers may have to pay unpaid wage and overtime and could be liable for 100% of the employee's share of Social Security and Medicare taxes.
   
2. Tax violations - Employers could face penalties for unpaid taxes and unfiled W2s.
   
3. Audits - Misclassification can trigger audits by various agencies to check for additional wage and tax irregularities.