How to classify an employee vs. independent contractor

The classification of employee vs. independent contractor can have many ramifications, from the way the person gets paid to the cost of utilizing their services.  For instance, if someone performing services for your company is an independent contractor, you do not have to pay certain taxes required for employees (Social Security tax and Medicare tax, to name a few).  Other costs for employees, such as health insurance and workers’ compensation insurance, may not apply either.

There is no bright-line test that can definitively answer this classification question; the IRS reviews this on a case-by-case basis.

Some of the indications that the person may be an “employee”:

  • You control or direct how the work is done through instruction or training
  • You control when the work is done
  • The person’s schedule is set by you
  • You supply the tools to accomplish the job

Some of the indications that they may be an “independent contractor”:

  • You didn’t control the work done by the individual
  • If they had other customers/clients
  • If the work is done off-premise
  • The individual makes their services available to the general public

Misclassifying an employee as an independent contractor can have some significant financial issues attached to it, so it is important to know the rules and how they apply to your employees.  For more information, please contact your ShindelRock professional or consult some details provided by the IRS here.