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Employee or Independent Contractor

Employment status can be confusing, especially when it comes to taxes. Why can some people work as independent contractors and not have taxes withheld from their pay, while others must file a W4 form and have taxes withheld from every paycheck? It's important to understand the difference, because a mistake in classifying yourself could be extremely costly, come April 15th.

The Internal Revenue Service uses the following 20 factors to help determine whether someone is an employee (W2 withholdings) or an independent contractor (1099).

The IRS 20-Factor Control Test

1. Making a profit or loss

Employees: paid for time worked and have no liability for business expenses.
Independent Contractors: can earn a profit or suffer a loss as a result of the work being done.

2. Work on specific premises

Employees: must work where their employers tell them.
Independent Contractors: usually able to perform their services where they choose.

3. Offering services to the general public

Employees: offer their services solely to their employers.
Independent Contractors: offer their services to the general public.

4. Right to fire

Employees: can typically be discharged by the employer at any time.
Independent Contractors: relationship with a hiring firm can only be terminated according to the terms of their agreement.

5. Furnishing tools and materials

Employees: generally furnish all the tools necessary to do the job.
Independent Contractors: furnish their own tools.

6. Method of payment

Employees: paid by unit of time.
Independent Contractors: paid a flat rate for a project.

7. Working for more than one firm

Employees: generally have one employer who can request loyalty.
Independent Contractors: usually have multiple clients or customers and are free from control by any one firm.

8. Continuing relationship

Employees: have a continuing relationship with the employer.
Independent Contractors: usually finish one project and move on.

9. Investment in equipment or facilities

Employees: have no investment in the equipment or facilities.
Independent Contractors: have some investment in the equipment and facilities.

10. Business or traveling expenses

Employees: business and travel expenses are paid by the employer.
Independent Contractors: pay for business and travel expenses.

11. Right to quit

Employees: may quit at any time without incurring a liability to the employer.
Independent Contractors: legally obligated to complete the work agreed to.

12. Instructions

Employees: may be given oral and written instructions about when, where and how they are to work.
Independent Contractors: decide on how to do their work.

13. Sequence of work

Employees: may be required to do their work in a sequence established by their employer.
Independent Contractors: decide for themselves the order or sequence in which they work.

14. Training

Employees: may receive training from their employers.
Independent Contractors: generally receive no training.

15. Services performed personally

Employees: required to personally perform the services they are hired to do.
Independent Contractors: may hire others to do the work they contract.

16. Hiring assistants

Employees: can only hire an assistant at the direction of the employer.
Independent Contractors: hire, supervise and pay their own assistants.

17. Set working hours

Employees: work hours are generally set by the employer.
Independent Contractors: set their own work hours.

18. Working full-time

Employees: may be required to work full-time.
Independent Contractors: free to work the hours they choose, usually also free to work for more than one client at a time.

19. Oral or written reports

Employees: may be required to submit regular reports on the progress of the work.
Independent Contractors: only responsible for the end results of the job contracted.

20. Integration into business

Employees: provide services which are integral to the company.
Independent Contractors: services are not molded to the firm's overall business as one integrated operation.