There is no strict definition of “employee”. In general, a worker is an employee if you have the right to control and direct the worker both as to the task to be accomplished and the manner in which that task is to be accomplished. The IRS has developed a twenty-factor analysis (Form SS-8) to aid in determining when a worker is an employee.
These twenty factors are applied on a case-by-case basis and are not weighted equally. In an audit, the IRS will typically take the position that a worker is an employee and force the employer to prove otherwise. Any agreement you have with your workers as to their status as independent contractors will have little or no force and effect on the IRS’s determination.
The twenty factors are as follows: INSTRUCTIONS. An “employee” typically must comply with instructions about when, where, and how to work. Moreover, control is present if the employer has the mere right to control how the work results are achieved. TRAINING. Training of an employee by an experienced employer indicates control, in that the employer will typically train the employee to perform tasks in the manner desired by the employer. On the other hand, independent contractors ordinarily use their own methods and receive no training from those hiring them. INTEGRATION WITH BUSINESS. An employee’s services are usually integrated into the employer’s business operations, because the services are important to the success or continuation of the business. PERSONALRENDITION OF SERVICES. An employee is required to render services personally. This shows that the employer is interested in the methods as well as the results. HIRING, SUPERVISING, AND PAYMENT OF ASSISTANTS. An employee generally works for an employer that hires, supervises, and pays assistants to the employee. ONGOING RELATIONSHIP. An employee generally has a continuing relationship with an employer, as contrasted with independent contractors, who typically work on a job-by-job basis. SET HOURS OF WORK. An employee usually has set hours of work established by an employer.
An independent contractor generally can set her own work hours. FULL-TIME REQUIRED. An employee may be required to work or be available full-time. This is another indication of control. Independent contractors typically may work at times they choose. WORK DONE ON EMPLOYER’S PREMISES. Whereas employees usually work on the premises of an employer, independent contractors can typically work at places of their choosing. SEQUENCE OF WORK DONE. Whereas an employee may be required to perform services in the order or sequence set by an employer, an independent contractor can choose the order or sequence of work. REPORTS REQUIRED.
An employee may be required to submit reports to an employer. This is another indication of control. PAYMENTS BY TIME INTERVAL. Whereas an employee is generally paid by the hour, week, or month, an independent contractor is usually paid by the job or on a straight commission. EXPENSES ACCOUNT. Payment by the employer of the worker’s business expenses is another indication of control. An independent contractor is typically required to bear his own expenses. TOOLS AND MATERIALS SUPPLIED. Employees are normally furnished most of the tools, materials, and other equipment necessary to perform the work functions by the employer. Independent contractors typically supply their own tools and materials. INVESTMENT IN EQUIPMENT AND FACILITIES.
Independent contractors typically have a significant investment in the equipment and facilities used in performing services for someone else. PROFIT OR LOSS. Whereas independent contractors can make a profit or suffer a loss, employees are typically paid regardless of the company’s profitability. AVAILABLE TO GENERAL PUBLIC. Independent contractors are generally free to provide and in fact do offer services to the general public. MORE THAN ONE EMPLOYER. Whereas an employee works for only one person, an independent contractor may work for more than one unrelated party. POWER TO FIRE. An employee can be fired by an employer.
An independent contractor cannot be fired without incurring potential liability. RIGHT TO QUIT. Whereas an employee can generally quit a job at any time without liability, an independent contractor is usually contractually obligated to complete a specific task or job.