One of the most common errors a business can make is not having the correct status for a worker. The IRS is clear on what differentiates employees from independent contractors. There are three defining areas the IRS takes into consideration: behavioral control, financial control, and the parties' relationship.
Behavioral Control:
Employees
Employees typically work specific hours as directed by their employer and at a location that the employer determines. They use the company's tools, equipment, and resources to perform their job. Additionally, their employer instructs them on how the work should be done.
Independent Contractors
Independent Contractors set their own hours and availability and determine when and where they will work. They also typically use their own tools, equipment, and resources to perform their work. Independent Contractors are not instructed on how their work is to be completed and also typically work for other clients.
Financial Control:
Employees
Employees are paid an hourly or salary wage, and taxes are withheld from their paychecks. The employer controls when the employee will be paid, and employees don't invoice the employer.
Independent Contractors
Independent Contractors have complete control of their business. They set their own payment terms as well as their own rates. Independent contractors often collect retainers and advanced payments. Clients typically do not withhold taxes when they pay an independent contractor.
Relationship:
Employees
Whether part-time or full-time, employees are required to perform work that is essential to the business. They are under the control of their employer and upper management.
Independent Contractors
Independent Contractors tend to perform short-term projects or regular specialized tasks based on their expertise. Their clients have no control over how their work is to be performed or the hours they work. The IRS generally assumes an employee relationship when in doubt, but the line can sometimes be ambiguous.
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