Independent Contractor or Employee ?


For federal tax purposes, it is important to determine whether an individual is an independent contractor or an employee. Worker classification affects how you pay federal income tax, social security and Medicare taxes, and how you file your tax return. It is vitally important for employers to know whether the individuals performing work for them or on their behalf are employees or independent contractors. Whether a worker is an independent contractor or an employee depends upon three primary factors:

1)    Behavioral Control over the worker;

2)    Financial Control over the worker; and

3)    The Relationship between the parties.


Behavioral Control considers whether the business has the right to direct and control how the worker does the task for which the worker was hired. For example, Courts have considered whether the business controls: when and where to do the work; what tools or equipment to use to complete the work; what workers to hire to assist with the work; where to purchase materials or supplies; and the sequence of the work.

Financial Control considers whether the business has a right to control the financial aspects of a worker’s job, including: the extent to which the worker has unreimbursed business expenses; whether the worker realizes a profit or loss on a project; and how the business pays the worker.

The Relationship of the Parties is also a factor. Courts look to whether the parties have a written contract describing their relationship; whether the business provides the worker with any employee-type benefits such as insurance, vacation, or sick pay; and the extent to which the services provided by the worker are a key aspect of the regular business of the company. 

It is important to note that no single factor will control whether a worker is an independent contractor on an employee. Rather, Courts consider all of these factors prior to making that determination.

The IRS has promulgated the “Twenty-Factor Test” which illustrates the factors the IRS utilizes in determining a worker’s status. The test can be found at www.irs.gov/pub/irs-pdf/p15a.pdf.