Independent Contractor vs. Employee

When workers perform services for a business, they may be classified as independent contractors (1099) or employees. It is critical that they be classified correctly. If the worker is an employee, generally the employer must withhold and deposit income taxes, Social Security taxes and Medicare taxes. In addition to these taxes, the employer must pay unemployment taxes and carry worker’s compensation insurance. This is generally not required for independent contractors.

How to Classify

To determine if an individual is an employee or an independent contractor, the business relationship between the business owner and the individual performing the services must be examined. All evidence of control and independence must be considered. Numerous factors are considered when deciding if a worker is an employee or an independent contractor. These factors fall into three main categories:

  • Behavioral control
  • Financial control
  • Relationship of the parties

If you are generally in control of (or have the right to control) these factors, the worker is more than likely to be categorized as your employee. Not all of the following factors need to be present to make a determination of worker status; however, all factors must be considered.

Behavioral Control

If you have the right to direct or control the manner and means in which services are performed, you have behavioral control over the worker. You do not have to actually direct or control the way work is done, as long as you have the right to do so. The following behavioral control factors indicate the worker is an employee that you:

  • Direct how, when, or where the work will be done
  • Specify which tools or equipment will be used
  • Specify the sequence in which services will be performed
  • Determine who will be hired to assist with the work
  • Decide where supplies and services will be purchased
  • Establish work hours
  • Require reports to be submitted
  • Provide training regarding procedures and methods

Financial Control

If you have the right to direct or control the administrative aspects of the work, you have financial control over the worker. The following financial aspects indicate the worker is an employee that you:

Reimburse or pay travel and business expenses

  • Pay at regular intervals (hourly, weekly, etc.)
  • Provide tools, materials and other equipment

The following financial aspects indicate the worker is an independent contractor:

  • The worker has an opportunity for profit or risk of loss
  • The worker has a significant investment in the work
  • The worker offers services to the general public
  • The services provided are not an integral part of the business (e.g., a bank hiring a plumber)

Relationship of the Parties

The following factors illustrate how you and your worker perceive your relationship and indicate your worker is an employee:

  • The worker has the right to quit without incurring liability
  • You have the right to fire the worker
  • The worker has the right to receive employee benefits
  • There is a continuing relationship between you and the worker
  • Services performed by the worker are a key aspect of the regular business activities

Written contracts are taken into consideration when determining worker classifications. However, the mere existence of a contract does not make a worker an employee or an independent contractor. The actual relationship between the parties must be examined.

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