1 20170418
IRS Common Law Test for determination and classification as employee vs. independent contractor is organized into three major categories:
Behavioral Control: Who controls how the work is done?
BEHAVIORAL CONTROL
EMPLOYEE
INDEPENDENT CONTRACTOR
Instructions
An employer has the right to give an employee
instructions regarding how, when and where the work
is performed.
The client has a right to specify the parameters of the
deliverables; not the details of how, when and where the work
is performed.
Training
Employees are often trained to do their jobs.
Independent Contractors are hired for their expertise and
should receive no internal training.
Financial Control: Who controls the business aspects of the worker’s assignment?
FINANCIAL CONTROL
EMPLOYEE
INDEPENDENT CONTRACTOR
Significant Investment
Employers provide the tools and equipment necessary
for their employees.
Independent Contractors provide their own tools and
equipment.
Unreimbursed Expenses
Employees are reimbursed for any out-of-pocket
business expenses they might incur.
Independent Contractors pay their own business expenses.
Marketing
Employees do not market their services to public.
Independent Contractors market their services to the public.
Method of Payment
Employees are paid based upon the passage of time—
guaranteed return for his/her labor.
Independent Contractors are generally to be paid upon the
completion of specific deliverables.
Opportunity for Profit/Loss
Employees generally have no opportunity for suffering
a loss.
Independent Contractors make business decisions that allow
them to not only make a profit but also have the opportunity to
suffer a loss.
Relationship of Parties: Worker’s and employer’s/purchaser’s type of relationship
RELATIONSHIP OF PARTIES
EMPLOYEE
INDEPENDENT CONTRACTOR
Intent of Parties
Expressed via employment contract; extent of
direction and control the employer requires over the
employee.
Expressed in a contract between the two parties; Independent
Contractor expresses his/her intent by fulfilling local and state
requirements for business (e.g., securing business license, etc.)
Employee Benefits
Employees are entitled to benefits such as vacation or
sick time, health care benefits and ability to attend
company sponsored events.
Independent Contractors provides his/her own benefits.
Termination
Within the confines of legal or contractual
requirements employees can be discharged at will by
the employer.
Contracts can only be terminated according to the
specifications of the contract. Non-performance on the part of
the contractor or client can lead to legal recourse.
Permanency of Relationship
Employer engages for indefinite period of time.
Specific services are for limited period of time.
Regular Business Activity
Employees perform services that are key aspects of
employer’s regular business activities.
Independent contractors perform services which do not affect
client’s bottom line. (limited exceptions)
