Independent Contractor or Employee - Knowing the Difference

It is important to determine whether you are hiring an independent contractor or an employee.  Misclassification of workers as independent contractors can result in substantial tax bills.  

To determine whether your worker is an employee, the IRS looks at three things: Behavioral Control, Financial Control, and the Relationship you have with the worker.

Behavioral Control:

1. If you maintain the right to direct not only what work is to be done, but also how it is to be done, your worker is most likely an employee.
2. If you direct only the result of the work, the worker is more likely an independent contractor.

Financial Control:

1. An employee usually is paid by the hour or given a salary. 
2. Employees generally provide services to one company rather to the general market.
3. If the worker is paid by the job, uses his own tools and sends you an invoice, he is likely an independent contractor.

Relationship:

1. Providing employee-type benefits such as retirement benefits or health insurance to a worker indicates he may be an employee.
2. A written contract often documents the type of relationship a business has with a worker.  For example, a contractor often provides a written estimate or contract before providing services.