The IRS recently issued Publication 1779 focused on determining the difference between Independent Contractors and Employees.
The IRS looks at three areas: behavioral control; financial control; and the relationship of the parties to determine worker classification.
Behavioral Control
These facts show whether there is a right to direct or
control how the worker does the work. A worker is an
employee when the business has the right to direct and
control the worker. The business does not have to actually
direct or control the way the work is done – as long as the
employer has the right to direct and control the work. For
example:
Instructions – if you receive extensive instructions
on how work is to be done, this suggests that you are
an employee. Instructions can cover a wide range of
topics, for example:
• how, when, or where to do the work
• what tools or equipment to use
• what assistants to hire to help with the work
• where to purchase supplies and services
If you receive less extensive instructions about what
should be done, but not how it should be done, you
may be an independent contractor. For instance,
instructions about time and place may be less important
than directions on how the work is performed.
Training – if the business provides you with training
about required procedures and methods, this indicates
that the business wants the work done in a certain way,
and this suggests that you may be an employee.
Financial Control
These facts show whether there is a right to direct or
control the business part of the work. For example:
Significant Investment – if you have a significant
investment in your work, you may be an independent
contractor. While there is no precise dollar test, the
investment must have substance. However, a significant
investment is not necessary to be an independent
contractor.
Expenses – if you are not reimbursed for some or all
business expenses, then you may be an independent
contractor, especially if your unreimbursed business
expenses are high.
Opportunity for Profit or Loss – if you can
realize a profit or incur a loss, this suggests that you
are in business for yourself and that you may be an
independent contractor.
Relationship of the Parties
These are facts that illustrate how the business and the
worker perceive their relationship. For example:
Employee Benefits – if you receive benefits, such as
insurance, pension, or paid leave, this is an indication that
you may be an employee. If you do not receive benefits,
however, you could be either an employee or an independent
contractor.
Written Contracts – a written contract may show what
both you and the business intend.
