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.