Independent Contractor or Employee: How Do I Know?
The easy answer is, there is no easy answer.
Even Janice Fritz, an HR consultant for Kuzneski Insurance Group, still struggles with these decisions.
“There’s a lot of things to consider, and it’s not easy. Even though I’ve been in HR for over 20 years, it’s still kind of a gut feeling,” Janice admits.
“It’s not an easy question to answer because there’s no bright line, black or white. I always say that recruiting is an art, not a science,” she says. “It’s kind of the same way with who is an independent contractor. It’s a totality of the circumstances. That’s as much guidance as you have.”
Several factors go into the decision to classify a worker as an independent contractor (IRS Form 1099) or as a payrolled employee (IRS Form W-2). Yet, it is an important determination, because misclassification can trigger costly financial penalties.
So, what’s the difference?
It boils down to this: The IRS looks at three general categories to determine whether a worker is a contractor or an employee: behavioral, financial and relationship.
- Behavioral: Do you control (or have the right to control) what the worker does and how they do their job?
- Financial: Are the business aspects of the worker’s job controlled by the payer, such as how the worker is paid, whether expenses are reimbursed and who provides the supplies?
- Relationship: Are there written contracts or employee-type benefits (insurance, 401(k), vacation, etc.)? Is the relationship permanent? Is the work that is performed a key aspect of the business?
In general, if the employer has a say over what the worker does, dictates the financial business aspects and provides benefits, then the worker is probably a W-2 employee. A worker is usually a 1099 employee if they get to determine how to do their job, are financially responsible for expenses and do not receive benefits. Independent contractors typically don’t have a long-term relationship with a company.
For example, an employee:
- Does not own their own business
- Is paid hourly, a salary or by piece
- Uses an employer’s materials, tools, equipment
- Typically works for one employer
- Has a continuing relationship with the employer
- Performs work assigned by the employer
And an independent contractor:
- Runs their own business
- Is paid upon completion of a project
- Provides own materials, tools, equipment
- Works with multiple clients
- Has a temporary relationship with employer
- Decides when/how to do the work
Luckily, the IRS does offer some help, Fritz says. In 2020, the IRS replaced the 20-Factor Test, long considered the standard for evaluating this decision, with the more voluminous Publication 15-A. (The former is still a useful tool though, as far as Janice is concerned.)
“If you can put yourself in the IRS’s shoes and make a call, that’s one way to do it,” she says.
And remember, KIG HR advisors, like Janice, for instance, can help guide your decision. Give us a call at (724) 349-1919.
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