Employee or Contractor: How Can You Tell the Difference?

By Gina Lemons

First and most importantly, you must establish the type of relationship between the employer and the person performing services for the employer’s company.

People such as lawyers, contractors, accountants, etc. who offer their services to the general public are not employees. A person is an independent contractor if the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

There are seven common law factors to help employers determine if someone is an employee or an independent contractor.

1. Right of Control – an employer controls or has the right to control the terms and conditions under which a worker performs service.
2. Right of Termination – an employee can be separated from employment or terminate employment at any time. An independent contractor can be discharged only for breach of contract.
3. Method of Payment – a worker is paid at regular intervals at a fixed rate.
4. Freedom to Select and Hire Helpers – independent contractors are usually responsible for hiring, supervising, and paying any helpers they need to complete a job.
5. Furnishing Tools and Equipment – an employer furnishes tools and equipment for the employee. An independent contractor furnishes their own tools and equipment necessary to perform a job.
6. Self-Scheduling of Workers – working hours suggests independence on the part of the worker.
7. Freedom to Render Services to Other Entities – is indicative of independent contractor status.

The IRS has recently been conducting research comprising detailed audit of 6,000 employers, and will use the results of this research to target future education and audit efforts. The IRS has determined during this research that many employers do not file required 1099s for independent contractors and classify workers as independent contractors when in fact they are employees.

The IRS has two publications to help employers correctly determine a worker’s status. Publication 1779 is a two-page guide specifically for employee assistance. Publication 15-A is an important tool for employers. This publication has a section that specifically discusses employee vs. independent contractor. It also has industry-specific examples that provide additional guidance.