To Contract Or Not To Contract: How To Tell Who Is Really An Employee

As many of us know, hiring an independent contractor can be a great way to save money. Besides the reduced cost of payroll and employee benefits, you can hire them based on the financial ebb and flow of your business. However, deciding if your independent contractor is really a contractor can be a little more difficult than you might think. 

According to the IRS, there are three main criteria that dictate who is an employee and who is a contractor (and,thus, self-employed). While there is no magic number or set number of factors that dictates whether or not a worker is an independent contractor, all of the answers to these questions go in to the determination by the IRS. A mistake made on this issue could prove to be lethal if faced with liability from unpaid wages and taxes, penalties and fines, and a plethora of other consequences.


1. Who dictates the workers schedule and what the worker does? Does the worker have additional clients?

If you are controlling the schedule of the worker, you might very well be considered an employer. However, it works in your favor if the worker has more than just you as his client.


2. Does your worker use their own equipment? Do they incur non-reimbursable expenses? Is the worker paid by the job completion or by some other system?

While using your equipment does not necessarily indicate independence, if they are using their own equipment and they incur non-reimbursable expenses due to the job (therefore exposing themselves to risking money), then there is a good chance that they would be qualified as an independent contractor. However, this only works if you pay the worker when the job is completed and not by some generic way such as hourly.


3. Does your worker enjoy employee benefits from you? Is this job indefinite or is there a set time limit? Does the worker provide a key aspect to your business?

If your worker is receiving your employee benefits, they are almost always considered to be an employee. If the job is for a set amount of time versus an indefinite job with consistent employment for the foreseeable future, then the employee would be considered  more of a contractor. One of the major determining factors is if the worker provides a critical link in your business (your business could not run or would run poorly if this person was not around), that person would be determined to be an employee.


It is important to note that the IRS does not recognize any agreements made between a worker and an employer regarding the status of employment/ contract work. Also, a common misconception is that as long as the worker is paid in the correct manner, they are considered to be contract help. This is incorrect and can be extremely financially detrimental to your company. One of the best ways to avoid making these costly mistakes is by hiring a PEO to handle all of your payroll and tax compliance needs.