SHARE

Classifying workers accurately is essential for your business. Whether someone is an employee or an independent contractor can impact everything from taxes to employee benefits to labor laws. Misclassifying workers can harm your bottom line, so it’s crucial to get it right.

Ultimately, how to classify workers comes down to control. This can be confusing because, according to the IRS, “There is no ‘magic’ or set number of factors that the worker an employee or an independent contractor, and no one factor stands alone “makes” in making this determination. Also, factors that are relevant in one situation may not be relevant in another.” Here is a breakdown of the difference between an employee and an independent contractor, according to the IRS.

They Are an Employee if…

Typically, the IRS says a team member should be classified as an employee if the business controls how, when, and with what tools the person uses to do a job. Here are some additional requirements to consider when classifying a team member as an employee.

• They Do Not Control How They Work: Employees are under the direct supervision of their employer, who usually defines their work hours, tasks, work location, and work methods.

• They Are Provided with Workspace, Tools, and Materials: Employees are usually given tools, materials, and a specific workplace by the employer.

• They Receive Instructions and Training: Employees usually receive detailed instructions and training from their employers on how to do their work.

• Their Work Relationship is Ongoing: Although employees may have an at-will employment agreement when a team member is hired as an employee, there isn’t typically an end date in mind. Whereas when a team member is hired as a contractor, a contractor agreement normally has an agreed-upon end date.

• They Receive Benefits: If your company offers benefits, employees who receive benefits are usually employees. The IRS views benefits as a sign of an employer-employee relationship because it’s uncommon for independent contractors to receive benefits. However, a team member who does not receive benefits is not necessarily an independent contractor since benefits eligibility is driven by labor laws and what the company decides to include in its benefits package.

They Are an Independent Contractor if...

Independent contractors, also known as freelancers, typically provide services to businesses, but the individual maintains control over how, when, and what tools they use to perform their work.

• They Control How They Work: Independent contractors generally control when, how, and where they work. They are often free to work with multiple businesses simultaneously and hire others to help with their work. They usually receive less detailed instructions than employees.

• They Are Not Given Tools and Materials: Freelancers are commonly expected to buy, own, and use their own tools and materials.

• They Are Not Reimbursed for Business Expenses: Independent contractors are generally not reimbursed for business expenses such as mileage, which employees are typically reimbursed for.

• They Stop Their Work on Defined Dates: The work of independent contractors is mainly limited to a specific project or period of time.

The Bottom Line

In short, the distinction between an employee and an independent contractor depends on the level of control the employer has in the relationship. It’s essential to get the difference between employees’ and contractors’ rights to avoid leaving your company open to both tax and legal liabilities.

Employee Forms

If you are hiring someone as an employee, you should have them complete Form W-4. You, as the employer, should complete Form W-2 and send it to the employee and the IRS.

Independent Contractor Forms

If you are hiring someone as an independent contractor, they should complete Form W-9. You, as the employer, should complete Form 1099-NEC.

Questions

Have questions about classifying your business’s workers correctly? Our team of business and tax advisory experts is here to help. Contact us.