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?