20 ways to tell a contractor from an employee
There are dozens of ways to determine whether a worker is an employee or a contractor according to the Internal Revenue Service. In general, there are three common-sense methods of distinguishing a contractor from an employee:
- Behavioral, how the work is accomplished
- Financial, employees enjoy more direct payment
- Relationship of the parties, the type of relationship the parties have as shown by written contracts, benefits, the permanent or transitory nature of the relationship and whether the worker is considered key to the firm’s regular business.
Here are 20 (plus one) of the most important guidelines the IRS uses to tell an employee from an independent contractor. Who controls the daily details of work is the primary basis of determination.
- Actual instruction or direction of worker. A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished.
- Training of a worker by an experienced employee working with him by correspondence, by required attendance at meetings or other methods is a factor indicating control by the employer over the particular method of performance. This is especially true if the training is given periodically or at frequent intervals. An independent contractor ordinarily uses his own methods and receives no training from the purchaser.
- Integration of worker services into business operations generally shows that they are subject to direction and control. When the success or continuation of a business depends to an appreciable degree on the performance of certain kinds of services, the people who perform those services must necessarily be subject to a certain amount of control by the business owner.
- If services must be rendered personally, it indicates an interest in the methods as well as the results. Lack of control may be indicated when the person has the right to hire a substitute with the permission or knowledge of the employer.
- Hiring, supervising and payments to assistants on the same job as the worker generally show employer control over the job. Sometimes one worker may hire, supervise and pay the other workers. If this is done under a contract requiring that the worker furnish materials and labor and under which she or he is responsible to attain a result, the worker is an independent contractor. On the other hand, if done so at the direction of the employer, the worker may be acting as an employee in the capacity of a foreman for, or representative of, the employer.
- The existence of a continuing relationship between an individual and the person for whom services are performed tends to indicate an employer-employee relationship. If the arrangement contemplates continuing or recurring work, the relationship is considered permanent, even if the services are rendered part-time, are seasonal in nature or the person actually works for only a short time.
- The establishment of set hours of work by the employer bars the worker from being master of their own time, the right of the independent contractor.
- Full-time work for the business is indicative of control by the employer since it restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when, and for whom, she or he chooses. Although not specified, full-time work may be required. For example, setting a quota, which requires all working time, or denying the right to work for anyone else, may indicate full-time employment.
- Doing the work on the employer’s premises implies employer control, especially where the work could be done elsewhere. The use of desk space, telephone and Internet provided by an employer places the worker within the employer’s direction and supervision unless the worker has the option to use the facilities. However, work done off-premises does not always indicate freedom from control since some occupations, i.e., employees of construction contractors, are necessarily performed away from the premises of the employer.
- If the order of the performance of services is, or may be, set by the employer, control by the employer may be indicated.
- The submission of regular oral or written reports indicates control since the worker must account for his actions.
- If the manner of payment is by the hour, week or month, an employer-employee relationship probably exists, whereas payment on a commission or job basis is customary for independent contractors. The guarantee of a minimum salary or the granting of a drawing account at stated intervals with no requirement for repayment of the excess over earning tends to indicate the existence of an employer-employee relationship.
- Payment of the worker’s business expenses by the employer indicates control of the worker.
- The furnishing of tools, materials, etc., by the employer indicates control over the worker.
- A significant investment by the worker in facilities used to perform services for another tends to show an independent status. And the furnishing of all necessary facilities by the employer tends to indicate the absence of independent status on the part of the worker. Facilities include equipment or premises necessary for the work but not tools, instruments, clothing, etc., commonly provided by employees in their particular trade. In order to be significant, the investment must be real, essential and adequate.
- The possibility of a profit or loss for the worker as a result of services generally shows independent contractor status. Factors that affect whether there is a profit or loss are whether the worker hires, directs and pays assistants; has an office, equipment, materials or other facilities for doing the work; has continuing and recurring liabilities or obligations; success or failure depends on the relation of receipts to expenditures; agrees to perform specific jobs for prices agreed upon in advance; and pays expenses incurred in connection with the work.
- Working for a number of persons at the same time often indicates independent contractor status because the worker is usually free, in such cases, from control by any of the firms. It is possible, however, that a person may work for a number of people or firms and still be an employee of one or all of them.
- The availability of services to the general public usually indicates independent contractor status. This may be evidenced by the worker having his own office and assistants, hanging out a shingle in front of the home or office, holding business licenses, maintaining business listings in telephone directories or advertising on the Internet, in newspapers, trade journals, magazines, etc.
- The right of discharge is that of an employer. An independent contractor, on the other hand, cannot be fired without incurring liability if producing a result that measures up to contract specifications. A restriction on the employer’s right to discharge in a labor union contract does not detract from the existence of an employment relationship.
- The right to quit at any time without incurring liability indicates an employer-employee relationship. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete the job.
- Bonus item: Benefits. Employees are often compensated with insurance, a pension plan, vacation pay or sick pay. Contractors rarely get such benefits.
For a more complete listing of IRS rules, see the Employer’s Supplemental Tax Guide (PDF) or Topic 762 – Independent Contractor vs. Employee. The IRS can also determine whether a worker is an employee; file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.