An employer may pay an independent contractor and an employee for the same or similar work, but there are important differences between the two with potentially costly consequences for the wrong classification. To better determine how to properly classify a worker, the employer should consider three control categories: behavioral control, financial control, and relationship.
Behavioral control consists of instructions, evaluations and training. If the worker is being told when and where they will be working and which tools and methods should be used, this will indicate the worker is an employee. A worker using their own methods, being evaluated only on the end result and receiving no on-the-job training, could indicate an independent contractor.
Financial control includes investment in equipment, on-the-job expenses, and method of payment. If the worker is provided all necessary job materials, is reimbursed for expenses, and is paid a regular wage for a period of time, then the worker would be considered an employee. A worker would generally be considered an independent contractor if they purchase their own materials and equipment to perform a job, is available to perform services for other businesses, is likely to have reimbursed expenses, and receives a flat fee for a specific job.
Relationship depends on how the business and the worker perceive their agreement. An independent contractor will likely have a written contract that describes the relationship the parties intend to put in place, the specific task, and specific term. An expectation of an indefinite relationship is more evident of an employment contract of an employee.
Worker misclassification can result in the business being liable for employment taxes and other employee benefits, such as insurance, retirement contributions, vacation or sick pay, and related tax penalties.
If you have any questions, please contact Justin Work, CPA at firstname.lastname@example.org or 314-576-1350.