Knowing whether to classify a worker as an employee or independent contractor is very important when it comes to taxes and benefits. A quick rule of thumb for separating the two is to look at the work being done. If the payor can control only the result not the process of how the work will be done, then the hired person would be an independent contractor. However not every situation is that simple. In a more complicated case, it is recommended to consider three categories.
1. Behavioral Control – Businesses have the right to control or direct the work done by employees. More specifically the details, instructions, training, and evaluation is all able to be monitored by the business if you are an employee. Even if the business does not use this right. Independent contractors typically have more flexibility with their jobs and are able to use their own methods.
2. Financial Control – Like behavioral, businesses have the right to control employee and independent contractor finances. Independent contractors typically work for a certain rate whereas employees receive regular payment. Other factors to look at is the opportunity for profit or loss, and the ability to seek out new business which both generally fall under an independent contractor.
3. Relationship – This is considered upon how the business and the worker see their relationship. Aspects to look for are the length or permanency, employees typically see relationships that are indefinite. Another is benefits, which are typically only given to employees. The relationship can also be described in a contract, which is useful but not enough to determine worker’s status.
If you’ve made it this far, congratulations! Taxes and forms are confusing, so I hope this information helped you! Most of this information came from the IRS website, so check it out if you need more. One last thing, you will save time and money if you get a Form W-9 from independent contractors on their own and provide them to your bookkeeper or tax accountant.