Employee or Contractor?

It is important to be able to discern an employee from a contract worker. This is a somewhat ambiguous distinction, but the main difference lies in the degree of control the company has over the work being performed. As a rule of thumb, if the company has complete control of the work, from its implementation to its output, then the individual is likely a type of employee. If the company has control over the output of the work but not how the work is performed, the individual is likely a contractor.

Contractors are required to fill out a W-9 form upon hire and their earnings are reported on a 1099-misc at the end of the tax year. A contractor's income is subject to self-employment tax. Employees are required to fill out a W-4 form upon hire and their wages may be subject to FICA and income tax withholding. Earnings are reported on a W-2 at the end of the tax year.

According to irs.gov, three categories must be considered when determining the balance of control and independence between a company and a worker.

1. Behavioral (How much will the company control the work).

2. Financial (How salary or pricing is handled).

3. Type of Relationship.

There is no formula for deciding if an individual is a contractor or employee. The best way to approach it is to consider all these factors and consider the relationship in it’s entirety.

If you are still unsure, you can have the IRS determine for you by filing a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). This process can take at least 6 months.