Independent Contractor vs Employee

Independent Contractor (1099) vs Employee (W-2)

Is it better to classify a worker as an independent contractor or employee?

There are pros and cons to both, but the decision should be based on the rules set by the IRS.

It is important to examine the relationship between the business and the worker.

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.

IRS 3-Category Test

To help you decide how to classify the work, the IRS provides three tests for you to consider – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control:  A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

• Type of instructions given
• Degree of instruction
• Evaluation systems 
• Training 

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:

• Significant investment
• Unreimbursed expenses
• Opportunity for profit or loss 
• Services available to the market
• Method of payment

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

• Written contracts 
• Employee Benefits
• Permanency of the relationship 
• Services provided which are a key activity of the business

Bottom Line

The IRS considers a worker to be an employee. It is up to you to prove otherwise.

For more details, check out this blog on the IRS.gov website - https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

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