Classifying a Worker: Independent Contractor or Employee?

A fine line separates an independent contractor from an employee and knowing that distinction can help you decide which worker best fits your situation and Internal Revenue Service guidelines.

When you’re ready to hire, determine how much control you’d like to have over the work. As a general rule, if you need to manage the end result but not the methods and means of achieving it, you’re in need of an independent contractor. If you need to manage the entire process, you’re better off hiring an employee. Bill Brunson, a spokesman for the IRS, recommends first reviewing the information about the two workers on the IRS website, specifically Publication 1779, Independent Contractor or Employee Brochure.

“Utilizing the website will help you make the best, most accurate decisions,” Brunson says. “This is where I’d direct anyone with a tax-law question.”

The IRS uses facts from three main categories—behavioral control, financial control and relationship of the parties—to determine whether the individual providing services is an employee or independent contractor. In addition to these considerations, it may also help to examine non-tax-related implications—such as training, wages and levels of expertise—that vary between the types of workers.

• You should hire an employee if:
• You’d prefer to give instructions on how, when and where to do the work.
• You’re able to provide training—such as a course, seminar or meeting with management or other employees—for the individual if needed.
• You’re prepared to fully integrate the employee and accept any successes—or blunders—encountered.
• You will reimburse the individual for expenses incurred because of work.
• You will withhold income tax and a portion of Social Security and Medicare taxes.
• You’re able to pay Social Security, Medicare and unemployment taxes on his or her wages, and you can provide a Form W-2, Wage and Tax Statement, showing how much you withheld from pay.

You should hire an independent contractor if:

• You want the individual to set hours and decide how to tackle the job.
• You need a person with a bank of expertise who is ready to hit the ground running and requires little or no training.
• You’re able to pay a higher hourly rate because of the level of expertise.
• You’ll allow the individual to work independently of your company to pursue other sources of income.
• You do not typically reimburse for expenses.
• You fill out Form 1099-MISC, Miscellaneous Income, to report what you pay to the worker.
• You do not deduct income tax from the worker’s wage or provide benefits.

Still having a hard time choosing whom to hire? Brunson suggests filling out form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to make a final determination.

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