Classifying workers as independent contractors or employees is essential for several tax reasons. The basis for this classification has two primary considerations: control and relationship.
Control refers to how much of the person’s work you control; this encompasses the completed work, its execution, and whether you control the financial aspects of the person’s job. In this manner, “control” means both behavioral and financial control.
Another critical factor is the relationship between the employer and the worker. How both parties perceive this relationship can guide you in determining the worker’s status. Some factors that influence relationships include the following.
- Written contracts that describe the relationship the parties intended to create.
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation, or sick pay.
- The permanency of the relationship.
- The extent to which services performed by the worker are a pivotal aspect of the company’s regular business.
- The extent to which the worker has unreimbursed business expenses.
Classifying your workers is essential because independent contractors and employees face different tax needs and implications.
*This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov5
Footnotes and Sources
- IRS.gov, January 24, 2023
