The IRS considers a worker an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Ask yourself, are you paying the worker to accomplish a result (an independent contractor), or are you paying the worker to perform a list of duties and responsibilities (an employee)?
Of course, like most things in the practice of law, it’s never as simple as results vs details. The IRS is cracking down on misclassification, and with the growth of the so-called gig economy, some states are even passing legislation to treat more workers as employees. The ultimate answer to the question “what’s the difference between an employee and an independent contractor” is “it depends.” How’s that for a lawyer answer?
The Factors to Consider
- Are you giving the worker detailed instructions? The more instruction you provide, the more likely the worker is an employee.
- Are you training the worker? Providing on-the-job training, whether at the start of the job or just periodically, tends to make the worker look like an employee.
- Are you providing tools and equipment to the worker? Independent contractors typically supply their own tools and equipment.
- Are you reimbursing the worker for their expenses? Employees almost always expect to be reimbursed for out-of-pocket expenses. For contractors, this can vary.
- Can the worker potentially earn a profit or loss on the job? Independent contractors are usually running their own business.
- Can the worker provide the same or similar services to others in the market? For a typical independent contractor, you won’t be their only client or customer.
- Are you paying the worker a regular wage or salary? Employees are usually paid some amount of money for a set amount of time. Contractors are typically paid for completing a set job or project.
- Do you have a written contract with the worker? While the contract isn’t the end of the discussion, having one that spells out what relationship the parties intended is a factor to be considered.
- Do you provide employment benefits to the worker (i.e., insurance, retirement, vacation or sick pay)? An independent contractor should not be earning employment benefits.
- Are you hiring the worker for an indefinite period of time? If there is no end date in mind, the worker is probably an employee.
- Is the worker performing services that are a key aspect of your business? If the worker’s responsibilities are at the core of the business, they are more likely to be an employee.
So, when deciding whether or not a new worker is an employee or an independent contractor, you really do have to consider all of the facts and circumstances. Given the penalties for getting it wrong, it’s better to err on the side of caution than to just assume you can get away with making every worker an independent contractor.
