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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.    

  1. Behavioral: Do you control (or have the right to control) what the worker does and how they do their job? 
  2. 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?  
  3. 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. 

For more information, read these blogs as well: 

How Do Worker Classifications Affect My Business? 

Contractor or Employee: Tax Forms You'll Need 

What If I Misclassify a Worker? 





Jason Levan

Jason Levan joined Kuzneski Insurance Group in 2021 as Director of Communications and Content after his first career as a newspaper reporter and editor. In Act II, he oversees the content marketing for the company, with the goal of making the insurance world easier to understand and navigate for our clients. When he’s not at work, you can often find him “banging and clanging” in the gym, or spending time with his family.

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