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.