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How do I decide who is an employee & who is an independent contractor?

Deciding who is an employee and who is an independent contractor is a decision that a business must make.


It is not one that can be made just because it will avoid payroll taxes or because issuing a 1099 makes the administration of the business simpler. The consequences of assigning the wrong classification can be very costly.

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IRS guidelines for making a good decision are based on the following common law rules. Notice that control is a major factor. There are many factors to consider so I recommend getting input from a CPA or attorney experienced in such matters. Note: Some states' rules are more stringent than the IRS.


Behavioral control factors
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Does the company control or have the right to control what the worker does and how the worker does his or her job?

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  • Type of instructions given

  • Degree of instruction

  • Evaluation systems

  • Training

 
Financial control factors
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Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.).

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  • Significant investment

  • Unreimbursed expenses

  • Opportunity for profit or loss

  • Services available to the market

  • Method of payment

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Type of relationship
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Are there written contracts or employee type benefits such as a pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?

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  • Written contracts

  • Employee benefits

  • Permanency of the relationship

  • Services provided as key activity of the business

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Other things to consider

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Not all states use the IRS criteria. Be sure to check your state's rules to make sure you are in compliance.

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Also read

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