Generally, the most important element in deciding whether a person is your employee or an independent contractor is control. In other words, if you have control over how the person does their job and what they produce, they are your employee. The Internal Revenue Service (IRS) has created a 20-factor test for determining is sufficient control exists in order to classify the person that you have hired as an employee.
These 20 factors are:
- Instructions - independent contractors direct themselves, employees are given instructions
- Training - employees are told to do things by a certain method or procedure
- Integration - employee's services are integrated into the company's operations, not separate from them
- Services Rendered Personally - independent contractors often delegate duties to subcontractors rather than doing the work personally
- Hiring, Supervising, and Paying Assistants - contractors can hire their own
- Continuing Relationship - employee's relationship with the company is ongoing, contractor may never work with the same employer twice
- Set Hours of Work - independent contractors make their own schedules
- Full-time Work - employees generally work full time
- Work Done on Employer's Premises - employees work on site
- Order or Sequence of Work to be Done Set by Employer - independent contractors can decide how work is done as long as it is finished according to the contract
- Oral or Written Reports - a person who must report to their employer on a regular basis is an employee
- Payments - employees are paid biweekly or monthly, contractors are paid by the job
- Expenses - employees business expenses are often covered by the company
- Tools and Materials - independent contractors will usually provide their own tools and material
- Investments - independent contractors make personal investments in equipment, advertising, etc.
- Profit or Loss - an employee's work will not generally change their pay, while an independent contractor's might
- Works for More than One Person or Firm - this is a good indicator that someone is not an employee
- Services Available to the General Public - an independent contractor makes his services available
- Right to Fire - independent contractors cannot generally be fired unless they have not performed up to the standards of the contract, while employees can be fired if for whatever reason
- Right to Quit - an employee can quit at any time, while an independent contractor is legally obligated to finish the work agreed upon
Should I Contact an Attorney?
The consequences for misclassifying one of your employees can be quite severe. A business attorney can assist you in reviewing these factors and making sure that you are paying the proper taxes for your employees and reporting payments made to any independent contractors you hire.