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Writer's pictureSarah Morris Ocampo

How to Determine if a Worker is an Independent Contractor or an Employee

An important aspect of business ownership is the classification of workers and what the implications are for each classification. It is necessary to identify the difference between an employee and an independent contractor. Further, each of these classifications necessitates different requirements for the business owner. Understanding how to distinguish between an employee and independent contractor is of the utmost importance as it relates to abiding by federal and state tax and employment laws.

In order to determine this difference, one must examine the employer-worker relationship. There are three areas of evaluation: “behavioral control, financial control, and type of relationship” (IRS Publication 15-A 2018). The evaluation of these factors is a balancing test on a case by case basis, so you should consult an attorney if the relationship is not clear.

Behavioral Control

First, an employee is defined as an individual who is under the control and direction of the business as it pertains to the work being performed. The employer establishes the parameters of when, where, and how the work gets done. The worker is more likely to be an independent contractor if the business has relinquished the control to determine the details of the work and performance.

Financial Control

The financial control of the worker also indicates whether they are an independent contractor or not. Whether or not the individual can establish a profit or loss independently highlights if the business is controlling the financial aspects of the worker’s job. If the worker is incurring their own costs, being paid on contractual basis, and assumes liability for their work, they are likely an independent contractor.

Type of Relationship

Finally, the type of relationship between the employer and worker indicates the classification they are in. If there is an indication of permanency in the relationship, it can be inferred that it was intended to be an employer-employee relationship.

Evaluating the Three Factors

In general, if the financial and behavioral control resides with the employer, the worker is classified as an employee. If the work is being performed under the guidelines determined by the worker, they are normally classified as an independent contractor. Each relationship is unique, so there may be additional factors to consider. The determination of the type of relationship will determine the employer responsibilities.

Responsibilities

If a worker is classified as an employee, the business is responsible for withholding and paying employment taxes, providing worker’s compensation benefits, and abiding by all other employment requirements, such as a minimum wage. If the worker is classified as an independent contractor, the business does not need to fulfill the aforementioned requirements.

Additional Resources

The IRS offers resources to help business owners distinguish between an employee and independent contractor, such as the Publication 15-A. This document provides extensive clarification on the differences between an employee and independent contractor, including industry-specific examples.

And finally, as we always say, “If you think you might need an attorney, you probably do.” Contact us to set up a complimentary consultation.

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