Independent Contractor versus Employee Status


How do you determine if a worker has employee or independent contractor status?

How do you determine who gets a Form 1099-MISC and who gets a Form W-2?

The classification of a worker as an employee or an independent contractor has important tax consequences. Worker classification effects how you pay your Federal Income Tax, Social Security and Medicare taxes, and how you file your tax return.  The person who has independent contractor status is the person whose earnings are reported on IRS Form 1099-MISC. The person who is classified as an employee is the person whose earnings are reported on IRS Form W-2. The worker classification of independent contractor or employee also effects the eligibility for employee benefits. Those who should be classified as employees, but are not, may lose out on workers' compensation, unemployment benefits, and in many cases, group insurance (including life and health) and retirement benefits.

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – behavioral controlfinancial control, and the type of relationship itself.

Where there is no controlling statute (e.g., statutory employees and statutory nonemployees), a worker's status is determined by applying the common law test, which applies for purposes of Federal Income Tax withholding, Social Security and Medicare, Federal Unemployment, and more.  A worker's status under the common law test is determined by applying relevant facts that fall into three main categories:  behavioral control, financial control, and the type of working relationship the individual has with the organization. It is very important to consider all the facts - no single fact provides the answer. 

Our online and onsite Independent Contractor Status Determination course will help you analyze the specifics of your situation for correct independent contractor and employee classifications.

Notice:  Alliance Training and Consulting, Inc. provides the contents of this page for general purposes only. You should not substitute this information for individual consultation with a qualified professional in the field. Alliance Training and Consulting, Inc. is not engaged in rendering legal services.

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