IRS Law on Independent Contractors Vs. Employees

Work Conditions

The first factor a business should consider when trying to decide if they have hired an independent contractor or an employee is to what extent the person controls the work he does. For example, if a boss at a job site has the power to pull a worker off one task and put him on another, he's probably an employee. Independent contractors contract to complete a job using their own tools and on their own schedule. The work is completed in any manner the contractor sees fit. In simple terms, he provides his skills on a per-job basis.

The second factor to examine is the method and manner by which payment is dispensed. In an employer/employee relationship, the boss decides which day will be payday and whether it will be by check, direct deposit, cash or another form. The employer is required to withhold certain federally mandated taxes from each amount due per pay period. An independent contractor pays his own taxes, negotiates his own fee and is free to take or leave the job if his price isn't met. Examples of independent contractors would be doctors, lawyers and accountants. At the end of the tax year, an employee receives a W-2 form summarizing his wages for the year. An independent contractor receives a 1099 form from each employer with whom he worked.

The presence of certain benefits indicate an employer-employee relationship exists. Examples are vacation pay, health insurance, sick leave and pension plans. The IRS sees these sorts of things as an indication that the relationship goes well behind that of an independent contractor and a job. A factor to consider is whether there is a valid employment contract. Another regards the nature of the work. If it is considered essential to the business, the IRS generally does not deem it to be of an independent contract nature.

According the IRS' own guidelines, there is no clear-cut path to decide whether the person in question is an independent contractor or an employee. It's common that some factors might point to one status and some to the other. Businesses should weigh the nature of the job in its entirety, ponder the weight of the evidence, then decide how to classify the contractor/employee. If a boss cannot decide, he can file Form SS-8 with the IRS and allow the agency to make the determination.