Independent Contractor or Employee?

What is an independent contractor?

General Definition

An independent contractor is engaged in a distinct profession and is in the business of providing services related to the job being contracted. Independent contractors have total control over the work being performed, set their own hours, pay for their own business expenses, and provide their own equipment, liability insurance, and office space.

Independent Contractor or Employee?

- Form IRS Publication 1779 (Rev. 12-99)

The courts have considered many facts in deciding whether a worker is an independent contractor or and employee. These relevant facts fall into three main categories: behavioral control; financial control; and relationship of the parties. In each case, it is very important to consider all the facts - no single fact provides the answer. Carefully review the following definitions.

Behavioral Control

These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

For example:

  • Instructions - if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics:

    • How, when, and where to do the work
    • What tools or equipment to use
    • What assistants to hire to help with the work
    • Where to purchase supplies and services
  • If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Financial Control

These facts show whether there is a right to direct or control the business part of the work.

For Example:

  • Significant Investment - if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
  • Expenses - if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
  • Opportunity for Profit or Loss - if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

Relation of the Parties

These are facts that illustrate how the business and the worker perceive their relationship.

For example:

  • Employee Benefits - if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
  • Written Contracts - a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.