Small Business Resources
Business Basics -
Employee vs. Independent Contractor
When hiring, it is important to determine whether a person should be classified as an employee or as an independent contractor. Failing to classify an employee or independent contractor correctly can have serious tax consequences for your business or organization.
But how do you know which type of classification to use?
An employee is someone that, as an employer, you have the ability to control what they will do and how it will be done. If you can determine how a person does their job and how they accomplish their tasks, they are most likely an employee.
An independent contractor can control how they perform the work themselves. They are only responsible to you for the end result or product of their work.
The IRS “Common Law Rules” have three categories that help determine the degree of control an employer has. Since no one factor will determine if someone is an employee or independent contractor, you must weigh all of the factors together - and understand that each individual situation is unique and should be evaluated separately for each person you hire.
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: 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.)
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?
(See: “Independent Contractor (Self-Employed) or Employee?” Internal Revenue Service, www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.)
If you determine the person you’re hiring is an employee, they’ll need to provide you with a W-4 so that you can withhold and pay the correct taxes as their employer.
An independent contractor will need to provide you instead with a W-9 so that you can complete a 1099-NEC for them to pay their own taxes and any other withholdings they’re responsible for.
Though these are the general guidelines for determining an employee vs. an independent contractor, there are some exceptions and special circumstances that you may need to consider. More information can be found on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
Please note, this information on this website does not constitute legal advice. It is provided for general information purposes only.