20 Questions to Determine If a Worker is an Employee or Independent Contractor

As your small business grows, you may be blessed with more projects than you can handle. Before you add helpers, let’s talk about whether to treat them as an employee or independent contractor. This classification can significantly impact the cost of employing that person. You need to structure their compensation to cover your business’ legal responsibilities, including payroll taxes and benefits.

The distinction between a staff member and contractor is widely misunderstood by business owners, especially in the construction industry. Sadly, the consequences for misclassification can lead to unnecessary financial penalties. We set up our clients’ accounts in compliance with the applicable tax laws, so you avoid nasty surprises, like having to pay back taxes for someone you paid as an independent contractor. 

Ask yourself these 20 questions to determine if a work relationship is primarily as an employee or independent contractor. They don’t have to meet every criteria, but these are the 20 factors the Federal Internal Revenue Service (IRS) weighs to decide if the overall nature of the relationship is employee or contractor. The IRS can help employers determine the status of their workers by using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

We’ve divided the list into the 3 categories identified by the IRS: Behavioral Control, Financial Control, and Relationship. A key nuance to notice is that 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. If you answer YES to most of these questions, then you should likely classify this worker as an EMPLOYEE. If this information leads to more questions, please call the BATS Xpress team to talk about your specific situation.

Behavioral Control

  1. Does the company give the worker detailed instructions on how to do the job?

  2. Is the worker completing full-time work?

  3. Does the worker have to work on the company’s premises? (Answer this question as if the COVID-19 health and safety rules that prevented a lot of in-person workplace activity don’t apply.)

  4. Does the business tell the worker the order to complete tasks?

  5. Does the business tell the worker what equipment to use?

  6. Can the company insist which worker does the work?

  7. Does the company provide training?

  8. Does the evaluation system measure how the work is performed?

  9. Are the worker’s services integral to the business operations?

Financial Control

  1. Has the business made a significant investment in the equipment the worker uses?

  2. Does the company reimburse the worker for expenses?

  3. Does the company hire, supervise, and pay the worker’s assistants?

  4. Is the worker paid a regular wage amount, even when supplemented with a commission, instead of a flat fee for the job?

  5. Is the worker paid only their wages, without realizing profits or losses through their work?

  6. Is the worker restricted from offering their services to the open market?

Relationship

  1. Does the contract define the worker as an “employee?”

  2. Does the business and worker have a continuous relationship?

  3. Is the worker primarily working for the company?

  4. Can the company unilaterally decide to let the worker go?

  5. Can the employee unilaterally decide to stop working with the business?


    Are you paying someone incorrectly as an independent contractor right now? Don’t worry! We can help you fix it. Call us today to work on a proactive resolution, before the IRS assesses payment so high that they sink your small business.