The IRS Test for Independent Contractor vs. Employee: Understanding the Differences
When it comes to working with independent contractors and employees, there are important differences that you need to be aware of as a business owner. Not only do the legal and financial requirements differ between the two, but the classification of your workers by the Internal Revenue Service (IRS) can impact your tax liability and potential legal issues.
In order to determine whether an individual should be classified as an independent contractor or an employee, the IRS has developed a set of guidelines that businesses must follow. These guidelines, known as the IRS Test for Independent Contractor vs. Employee, evaluate three main factors: behavioral control, financial control, and the relationship between the worker and the business.
Behavioral Control
Behavioral control refers to the degree of control that the business has over how the worker performs their job. In general, if the business has the right to control the details of how, when, and where work is done, the worker is likely an employee. If the business only has the right to control the outcome of the work, but not the methods, the worker is likely an independent contractor.
For example, if a business hires a writer to create content for their blog, but they dictate how the content should be written and require the writer to use specific software and tools, this likely indicates that the worker is an employee. On the other hand, if the writer has the freedom to choose their own writing methods and tools, and is only required to submit the completed content by a certain deadline, this indicates that the worker is an independent contractor.
Financial Control
Financial control refers to the extent to which the worker is financially dependent on the business. If the worker is dependent on the business for their income, benefits, and expenses, they are likely an employee. If the worker has multiple sources of income and takes on their own expenses, they are likely an independent contractor.
For example, if a business hires a graphic designer to create marketing materials and pays for their software, equipment, and supplies, this likely indicates that the worker is an employee. On the other hand, if the graphic designer uses their own equipment and pays for their own software and supplies, this indicates that the worker is an independent contractor.
Relationship between the Worker and the Business
The relationship between the worker and the business is also an important factor in determining their classification. If the worker performs work that is a key aspect of the business, is a long-term employee, or is provided with benefits and employee status, they are likely an employee. If the worker performs work that is not a key aspect of the business, is hired for a specific project, and does not receive benefits or employee status, they are likely an independent contractor.
For example, if a business hires a marketing consultant to help develop a marketing strategy and does not provide them with benefits or employee status, this indicates that the worker is an independent contractor. On the other hand, if a business hires a full-time marketing manager who is a key aspect of the business and receives benefits and employee status, this indicates that the worker is an employee.
In Conclusion
Understanding the IRS Test for Independent Contractor vs. Employee is important for any business owner who works with freelancers or contract workers. By properly classifying your workers, you can avoid potential legal issues and ensure that you are meeting your tax obligations. If you are unsure about the classification of a worker, it is always best to consult with a legal or tax professional for guidance.