Independent Contractor (Self-Employed) or Employee?
It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Select the Scenario that Applies to You:
- I am an independent contractor or in business for myself
If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center.
- I hire or contract with individuals to provide services to my business
If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are.
Determining Whether the Individuals Providing Services are Employees or Independent Contractors
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Independent Contractor Defined
People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
If you are an independent contractor, you are self-employed. To find out what your tax obligations are, visit the Self-Employed Tax Center.
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
Employee (Common-Law Employee)
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.
- A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
- A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
The behavioral control factors fall into the categories of:
- Type of instructions given
- Degree of instruction
- Evaluation systems
Types of Instructions Given
An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to assist with the work.
- Where to purchase supplies and services.
- What work must be performed by a specified individual.
- What order or sequence to follow when performing the work.
Degree of Instruction
Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.
If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
The financial control factors fall into the categories of:
- Significant investment
- Unreimbursed expenses
- Opportunity for profit or loss
- Services available to the market
- Method of payment
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.
Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.
Opportunity for profit or loss
The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor.
Services available to the market
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
Method of payment
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Type of Relationship
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
The factors, for the type of relationship between two parties, generally fall into the categories of:
- Written contracts
- Employee benefits
- Permanency of the relationship
- Services provided as key activity of the business
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
Permanency of the Relationship
If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
Services Provided as Key Activity of the Business
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).
Employment Tax Obligations
Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.
If you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the contractor complete Form W-9 (PDF), Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the worker. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). The W-9 (PDF) should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.
Form 1099-MISC (PDF) is most commonly used by payers to report payments made in the course of a trade or business to others for services.
If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-MISC (PDF) needs to be completed, and a copy of 1099-MISC (PDF) must be provided to the independent contractor by January 31 of the year following payment. Starting with 2016, you must also send a copy of this form to the IRS by January 31.
Also note that independent contractors may have their own employees or may hire other independent contractors (subcontractors). In either case, they should be aware of their tax responsibilities, including filing and reporting requirements, for these workers.
There are certain situations where a 1099 is not required. These exceptions are listed in the 1099 Instructions (PDF).
If you are self-employed, visit the Self-Employed Individuals Tax Center page for information about your tax obligations.
Understand the various types of taxes you need to deposit and report such as, federal income tax, social security and Medicare taxes and Federal Unemployment (FUTA) Tax.
You must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes. You also must report on the taxes you deposit, as well as report wages, tips and other compensation paid to an employee.
You must deposit and report your employment taxes on time.
“X” forms are used to report adjustments to employment taxes and to claim refunds of overpaid employment taxes. There are several additional ways to address adjustments to the employment taxes you reported on your return.
Learn how to electronically file your employment tax forms.
There are several ways to notify the IRS that your address has changed.
Misclassification of Employees
Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.
If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information.
Misclassified Workers Can File Social Security Tax Form
Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
Voluntary Classification Settlement Program
The Voluntary Classification Settlement Program (VCSP) is an optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.
Online Learning and Educational Products
IRS Tax Calendar for Businesses and Self-Employed
The tax calendar is available for downloading and printing, or you can view it online.
IRS Video Portal
The IRS Video portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals. You will find video clips of tax topics, and archived versions of live panel discussions and webinars.
Small Business Taxes: The Virtual Workshop
Topics include: What you need to know about Federal Taxes and your new business, how to set up and run your business so paying taxes isn’t a hassle, Federal Unemployment Taxes, and much more.
Small Business Products Online Ordering
Looking for a tool to help you meet your tax requirements? Choose from our free products, developed especially for the Small Business/Self-Employed person, and obtain updated information on existing products. Order today online or by calling 800-829-3676.
Tax Scams – How to Report Them
To help the public recognize and avoid abusive tax schemes, the IRS offers an abundance of educational materials. Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. Education is the best way to avoid the pitfalls of these “too good to be true” tax scams.
Basic Tools for Tax Professionals
This tool is to help practitioners find information needed to better serve their clients. A one stop shop.
SBA Learning Center
Find self-paced online training courses, quick videos, Web chats and more to help you learn about the many aspects of business ownership. You can also sort your selections by content type and topic.
The Understanding Taxes program features over 1,100 pages of content designed to make learning taxes interactive, relevant and educational. Understanding Taxes makes real world connections to classroom instruction. It is a great resource for high schools, community colleges and the general public for learning more about the history, theory and application of taxes in the United States.
Link and Learn Taxes
This web-based program is the core curriculum through which IRS Partners and Volunteers are given quality baseline training in tax return preparation. This fun, interactive course teaches you the basics to accurately prepare income tax returns for individuals AND obtain your volunteer certification along the way-at your own pace!
Independent Contractor or Employee Worksheet
FACTORS INDICATING CONTROL
NOTE: These factors are only possible indicators of a worker’s status. Each case must be determined on its own facts, based on all the information.
|Is the worker required to comply with employer instructions about when, where and how work is to be performed?|
Is the worker required to undergo training?
|Does the worker hire, supervise and pay others to perform work for which he or she is responsible?|
|Must the worker’s job be performed during certain set hours?|
Must the worker devote full time to the job?
|Must the work be performed on the employer’s property?|
|Must tasks be performed in a certain order set by the employer?|
|Is the individual required to submit regular written or oral reports to the employer?|
Is payment by the hour, week or month?
Is payment in a lump sum?
|Are the worker’s business and travel expenses paid by the employer?|
|Does the employer furnish the tools and materials required for the job?|
|Does the worker rent his or her own office or working space?|
|Will the worker realize a profit or loss as a result of his or her services?|
|Does the individual work for more than one firm at a time?|
|Does the worker make his or her services available to the general public?|
|Does the employer have the right to fire the worker?|
|Does the worker have the right to quit the job at any time, whether or not a particular task is complete?|
This Agreement is made between ____________________ (“Client”) with a principal place of business at __________________ and _______________ (“Contractor”), with a principal place of business at ____________________________.
- Services to Be Performed
Contractor agrees to perform the following services: _____________
Contractor agrees to perform the services described in Exhibit A, which is attached to this Agreement.
In consideration for the services to be performed by Contractor, Client agrees to pay Contractor at the following rates: ____________________________.
Contractor shall be paid within a reasonable time after Contractor submits an invoice to Client. The invoice should include the following: an invoice number, the dates covered by the invoice, and a summary of the work performed.
Contractor shall be responsible for all expenses incurred while performing services under this Agreement. This includes automobile, truck, and other travel expenses; vehicle maintenance and repair costs; vehicle and other license fees and permits; insurance premiums; road, fuel, and other taxes; fines; radio, pager, or cell phone expenses; meals; and all salary, expenses, and other compensation paid to employees or contract personnel the Contractor hires to complete the work under this Agreement.
Client shall reimburse Contractor for the following expenses that are attributable directly to work performed under this Agreement: _________________.
Contractor shall submit an itemized statement of Contractor’s expenses. Client shall pay Contractor within 30 days after receipt of each statement.
- Vehicles and Equipment
Contractor will furnish all vehicles, equipment, tools, and materials used to provide the services required by this Agreement. Client will not require Contractor to rent or purchase any equipment, product, or service as a condition of entering into this Agreement.
- Independent Contractor Status
Contractor is an independent contractor, and neither Contractor nor Contractor’s employees or contract personnel are, or shall be deemed, Client’s employees. In its capacity as an independent contractor, Contractor agrees and represents, and Client agrees, as follows
[Check all that apply]
[ ] Contractor has the right to perform services for others during the term of this Agreement.
[ ] Contractor has the sole right to control and direct the means, manner, and method by which the services required by this Agreement will be performed. Contractor shall select the routes taken, starting and quitting times, days of work, and order the work is performed.
[ ] Contractor has the right to hire assistants as subcontractors or to use employees to provide the services required by this Agreement.
[ ] Neither Contractor nor Contractor’s employees or contract personnel shall be required to wear any uniforms provided by Client.
[ ] The services required by this Agreement shall be performed by Contractor, Contractor’s employees, or contract personnel, and Client shall not hire, supervise, or pay any assistants to help Contractor.
[ ] Neither Contractor nor Contractor’s employees or contract personnel shall receive any training from Client in the professional skills necessary to perform the services required by this Agreement.
[ ] Neither Contractor nor Contractor’s employees or contract personnel shall be required by Client to devote full time to the performance of the services required by this Agreement.
- Business Licenses, Permits, and Certificates
Contractor represents and warrants that Contractor and Contractor’s employees and contract personnel will comply with all federal, state, and local laws requiring drivers and other licenses, business permits, and certificates required to carry out the services to be performed under this Agreement.
- State and Federal Taxes
Client will not:
- withhold FICA (Social Security and Medicare taxes) from Contractor’s payments or make FICA payments on Contractor’s behalf
- make state or federal unemployment compensation contributions on Contractor’s behalf, or
- withhold state or federal income tax from Contractor’s payments.
Contractor shall pay all taxes incurred while performing services under this Agreement—including all applicable income taxes and, if Contractor is not a corporation, self-employment (Social Security) taxes. Upon demand, Contractor shall provide Client with proof that such payments have been made.
- Fringe Benefits
Contractor understands that neither Contractor nor Contractor’s employees or contract personnel are eligible to participate in any employee pension, health, vacation pay, sick pay, or other fringe benefit plan of Client.
- Unemployment Compensation
Client shall make no state or federal unemployment compensation payments on behalf of Contractor or Contractor’s employees or contract personnel. Contractor will not be entitled to these benefits in connection with work performed under this Agreement.
- Workers’ Compensation
Client shall not obtain workers’ compensation insurance on behalf of Contractor or Contractor’s employees. If Contractor hires employees to perform any work under this Agreement, Contractor will cover them with workers’ compensation insurance to the extent required by law and provide Client with a certificate of workers’ compensation insurance before the employees begin the work.
Client shall not provide insurance coverage of any kind for Contractor or Contractor’s employees or contract personnel. Contractor shall obtain the following insurance coverage and maintain it during the entire term of this Agreement:
[Check all that apply]
[ ] Automobile liability insurance for each vehicle used in the performance of this Agreement — including owned, non-owned (for example, owned by Contractor’s employees), leased, or hired vehicles — in the minimum amount of $_____ combined single limit per occurrence for bodily injury and property damage.
[ ] Comprehensive or commercial general liability insurance coverage in the minimum amount of $______ combined single limit, including coverage for bodily injury, personal injury, broad form property damage, contractual liability, and cross-liability.
Before commencing any work, Contractor shall provide Client with proof of this insurance and with proof that Client has been made an additional insured under the policies.
Contractor shall indemnify and hold Client harmless from any loss or liability arising from performing services under this Agreement.
- Term of Agreement
This agreement will become effective when signed by both parties and will terminate on the earlier of:
- the date Contractor completes the services required by this Agreement
- ____________ [date], or
- the date a party terminates the Agreement as provided below.
- Terminating the Agreement
With reasonable cause, either Client or Contractor may terminate this Agreement, effective immediately upon giving written notice.
Reasonable cause includes:
- a material violation of this Agreement, or
- any act exposing the other party to liability to others for personal injury or property damage.
Either party may terminate this Agreement at any time by giving ____ days’ written notice to the other party of the intent to terminate.
- Exclusive Agreement
This is the entire Agreement between Contractor and Client.
- Modifying the Agreement
This Agreement may be modified only by a writing signed by both parties.
- Resolving Disputes
If a dispute arises under this Agreement, any party may take the matter to California state court, jurisdiction of the county of Alameda.
If a dispute arises under this Agreement, the parties agree to first try to resolve the dispute with the help of a mutually agreed-upon mediator in Alameda County, CA. Any costs and fees other than attorney fees associated with the mediation shall be shared equally by the parties. If it proves impossible to arrive at a mutually satisfactory solution through mediation, the parties agree to submit the dispute to a mutually agreed-upon arbitrator in Alameda County, CA. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction to do so. Costs of arbitration, including attorney fees, will be allocated by the arbitrator.
Contractor acknowledges that it will be necessary for Client to disclose certain confidential and proprietary information to Contractor in order for Contractor to perform duties under this Agreement. Contractor acknowledges that disclosure to a third party or misuse of this proprietary or confidential information would irreparably harm Client. Accordingly, Contractor will not disclose or use, either during or after the term of this Agreement, any proprietary or confidential information of Client without Client’s prior written permission except to the extent necessary to perform services on Client’s behalf.
Proprietary or confidential information includes:
- the written, printed, graphic, or electronically recorded materials furnished by Client for Contractor to use
- any written or tangible information stamped “confidential,” “proprietary,” or with a similar legend, or any information that Client makes reasonable efforts to maintain the secrecy of
- business or marketing plans or strategies, customer lists, operating procedures, trade secrets, design formulas, know-how and processes, computer programs and inventories, discoveries, and improvements of any kind, sales projections, and pricing information
- information belonging to customers and suppliers of Client about whom Contractor gained knowledge as a result of Contractor’s services to Client, and
- other: _____________________.
Upon termination of Contractor’s services to Client, or at Client’s request, Contractor shall deliver to Client all materials in Contractor’s possession relating to Client’s business.
Contractor acknowledges that any breach or threatened breach of Clause 18 of this Agreement will result in irreparable harm to Client for which damages would be an inadequate remedy. Therefore, Client shall be entitled to equitable relief, including an injunction, in the event of such breach or threatened breach of Clause 18 of this Agreement. Such equitable relief shall be in addition to Client’s rights and remedies otherwise available at law.
- Proprietary Information.
- The product of all work performed under this Agreement (“Work Product”), including without limitation all notes, reports, documentation, drawings, computer programs, inventions, creations, works, devices, models, work-in-progress and deliverables will be the sole property of the Client, and Contractor hereby assigns to the Client all right, title and interest therein, including but not limited to all audiovisual, literary, moral rights and other copyrights, patent rights, trade secret rights and other proprietary rights therein. Contractor retains no right to use the Work Product and agree not to challenge the validity of the Client’s ownership in the Work Product.
- Contractor hereby assigns to the Client all right, title, and interest in any and all photographic images and videos or audio recordings made by the Client during Contractor’s work for them, including, but not limited to, any royalties, proceeds, or other benefits derived from such photographs or recordings.
- The Client will be entitled to use Contractor’s name and/or likeness use in advertising and other materials.
- No Partnership
This Agreement does not create a partnership relationship. Contractor does not have authority to enter into contracts on Client’s behalf.
- Assignment and Delegation
Either Contractor or Client may assign rights and may delegate duties under this Agreement.
Contractor may not assign or subcontract any rights or delegate any of its duties under this Agreement without Client’s prior written approval.
- Applicable Law
This Agreement will be governed by California law, without giving effect to conflict of laws principles.
Taxpayer ID Number
Attachments: _____Exhibit A: Additional Description of Services to be Performed
(chk if applicable)