Employee vs contractor- which is the right classification

Employee vs Contractor – which is the right classification?


As a business owner, you may require hiring an expert to help you with various projects. Many employers classify employees as contractors that triggers an IRS audit.


Following are few basic rules that distinguish employees from contractors. 

  1. Relationship:  How the employee and business perceives the business relationship is an important rule for the classification.
    1. Does the contractor provide special services?
    2. Does the contractor claim similar benefits similar to regular employees?
    3. Are there defined scope and responsibilities between contractor and the business?

    2. Financial control:  An important factor in determining contractor vs employee is the level of control between contractor and the business.  

            1. Do Contractors use their own tools or equipment in performing services?

            2. Are they paid regular monthly salary or is their opportunity for profit or loss?

            3. How are contractors paid? Are they paid a flat fee?

            4. How Contractors are reimbursed for business expenses?

   3. Behavioral control:

            1. Do they work independently or do they receive instructions on how to perform the work by their supervisor?

            2. Are they receiving similar training to employees?

            3. Various methods that are being used to measure employee performance?


End of the year compliances

 1. All contractors receive form 1099 and then report their income as self-employed earnings on their tax returns.

 2. All employees receive a form W2 to report their salaries.

IRS has a special form of SS8 that can be reviewed to determine the status of the employee. In addition, for more information, you can contact us via our contact form here





Posted In: Tax

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