Classifying workers correctly is critical. The IRS looks closely at this because employees require withholding of income tax, Social Security, and Medicare, while independent contractors do not.
The Core Test: Control
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
Common Factors
The IRS historically used a "20 Factor" test, which has been grouped into three main categories:
- Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job? (e.g., instructions, training).
- Financial Control: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies).
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?