Independent Contractor or Employee?
In some scenarios, it is difficult to answer the question of whether you’ve hired an independent contractor or an employee. However, there is one word to use when trying to answer this question: control.
California and the IRS have tests to determine the status of a worker, but control is the main ingredient.
Do you direct the end result of the work, but not the means and methods of getting it done? You more than likely have an independent contractor. Keep in mind, too, that often – but not always – independent contractors have multiple clients or customers.
By contrast, do you instruct the worker on how to do the work, where to do the work, and implement strict guidelines on progress and completion? If so, it is more likely that the IRS will classify this worker as an employee. Additional factors that would tend to lead to this conclusion would include that you provide training, or you provide tools and/or equipment to the worker.
Still unsure? Complete and submit IRS Form SS-8 to determine the status of the worker. The IRS will provide an official determination as to the status of a worker.
If you hire a worker and execute an independent contractor agreement, that agreement itself will not automatically classify that worker as an independent contractor. Rather, the IRS will still look to the level of control the employer has over the worker. With that in mind, after you have made the determination that your worker is in fact an independent contractor (you have determined that the control over the worker is minimal and not to the level of classifying him or her as an employee), the independent contractor agreement should clearly and adequately identify the role of this hired third party. If not drafted properly and the worker starts taking on roles more akin to an employee, it could ultimately affect that worker’s status as an independent contractor. Of course, the agreement should include language regarding the worker’s status as an independent contractor.
Do not tread these waters lightly. Misclassification of workers can cause employers a great deal of time and money, even if the misclassification was unintentional.