How To Determine If A Worker Qualifies As An Employee Or Independent Contractor

The Internal Revenue Service recently released an information letter that clarifies the primary factors used to determine whether a given worker should be properly classified as an employee or as an independent contractor for tax purposes. 

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When evaluating worker employment status and distinguishing between employees and contractors, the main consideration is how much control and autonomy does the worker have in doing the job. That autonomy and control can be analyzed in light of three primary factors: behavioral control, financial control, and the relationship between the parties. 

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• Behavioral Control: The main question to ask when assessing whether a worker is subject to the behavioral controls of a supervisor and should therefore rightly be classified as an employee is whether or not the recipient of the worker’s services has the right to control or direct how the work is done. Providing the worker with training or instructions on how to complete the required task and/or providing an evaluation of the worker’s performance or an evaluation of the work itself upon completion might all be indicative that the worker should be classified as an employee.

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• Financial Control: Whether the recipient of the worker’s services has control over the financial aspects of the job is another important consideration when assessing employment status. For example, some good questions to ask are how was the method of paying the worker determined, has the worker made a significant investment in order to complete the work (as well as if/how reimbursements were involved), and whether or not there was an opportunity for the worker to profit or incur a net loss as a result of their work. 

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• Relationship Between Worker and Work Recipient: The relationship between the parties is not only determined by their agreements and contracts, but also by their other actions with respect both to the work and to each other. How each party represents the nature of their relationship to others, including other employees and/or contractors can also factor into the determination, in addition to whether or not the worker offers similar services more broadly to the market in general.

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In the aforementioned information letter, the IRS also noted that while it can not make determinations as to whether or not a prospective worker would properly be classified as an employee or independent contractor, the IRS will issue a letter ruling on prior employment status which can then be applied to all other workers engaged under substantially similar circumstances. 

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You can find that IRS information letter here.