The decision to engage an independent contractor or to hire a new employee for your business turns on many varying factors. To make the right decision for your business, you need to understand the difference between indepedent contractors and employees.
There are three important factors that goverment agencies and courts consider when deciding whether a worker is an independent contractor or an employee. They are: Behavioral Control; Financial Control; and Relationship of the Parties.
Behavioral Control: If you have control over how the worker does the work, that worker would be considered an employee. If you have less control over how the work is done and less extensive instructions on what work should be done, that worker may be considered an independent contractor. If your business is providing training for a worker, that worker would be considered an employee.
Financial Control: Reimbursing a worker for expenses and controlling his rate of pay suggests that the worker is an employee. An independent contractor would have significant investment in his work, would have the opportunity to provide services independently for multiple clients, and generally would not be reimbursed for expenses. Independent contractors can realize a profit or loss.
Relationship of Parties: Employees may receive benefits from the company such as, health benefits or paid leave. Independent contractors receive no benefits from the company other than payment for the work performed.
The IRS considers 20 factors in your business when resolving the right-to-control issue. These factors consist of the following:
| Employee | Independent Contractor |
|---|---|
| The employer instructs you about when, where and how the work will be perfomed. | You perform the work on your own, with no direction. |
| The employer trains you. | You do not require training. |
| Your work is merged into the business and there is evidence of direction and control. | You do not require direction. |
| You personally perform work for the employer. The methods used to perform the work result in benefits to you. | You do not receive any benefits other than payment at the end of the contract. |
| The employer hires assistants to help you with your work. | You hire assistants to help complete the work. |
| There is a continual relationship between you and your employer (even when the work is performed on an irregular basis). | The relationship between you and the company ends when the work contracted for is completed. |
| Your employer sets hours that you are required to work. | You set your own hours. |
| You perform your work on a schedule which restricts you from working elsewhere. | You work for whomever you choose, whenever you choose. |
| You perform your work on your employer's premises or your employer directs you to travel to different locations to perform your work. | You perform your work wherever you choose |
| Your employer instructs you to perform your work in a certain order. | You determine how your work is performed. |
| Your employer requires you to submit oral or written reports. | You are not required to submit reports. |
| Your employer pays you by the hour, week, or month. | You are paid at the completion of the project. |
| Your employer pays you for your business and/or traveling expenses. | You pay for all of your own expenses. |
| Your employer furnishes tools, materials, or other equipment needed. | You supply your tools, materials, and equipment. |
| Your employer furnishes tools, materials, or other equipment needed. | You have invested in facilities or equipment to perform the work. |
| You do not realize a profit or loss from services you provide or perform. | You realize profits or losses from the work you perform. |
| You only work for one firm at a time. | Your services are available to the general public on a consistent basis. |
| Your employer can terminate you. | You cannot be terminated if you are performing the contract according to its specifications. |
The matters discussed here are for general reference. If you have any questions about business matters for your unique situation, we welcome your inquiry.