The following is a general guideline for resolving the difference between an employee and an independent contractor.
The distinction between whether a worker is an employee or an independent contractor is an important one. If your worker is an employee, you must generally withhold income taxes and withhold and pay Social Security, Medicare, and unemployment taxes on his or her wages. You do not generally have to withhold or pay these taxes on payments to independent contractors.
The decision also affects eligibility for employee benefits. For example, employees may be eligible for workers compensation, unemployment benefits, group insurance (including life and health), and retirement benefits, while independent contractors need not be covered.
Finally, the proper classification can help you avoid significant tax penalties.
Defining the business relationship
Whether a worker is an employee or an independent contractor depends on issues of control and independence. Generally, a worker is considered an independent contractor if the employer has the right to control or direct the result of the work, but not the means or methods of accomplishing the result.
Someone who works for you is generally considered an employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.
Behavioral control includes whether the business has a right to direct and control how the work is done through instructions, training, or other means.
Financial control includes facts showing whether the business has a right to control the financial and business aspects of the workers job, including: