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Independent Contractor vs Employee

One of the questions most commonly asked of me by clients or business decision makers is whether they should classify someone associated with their organization as a contractor or employee.

My guidance always directs them to the IRS rules around determining the relationship status. This is an area that the IRS places lots of scrutiny so it is important to be sure to know the common law rules:

  1. Type of Relationship - Have you entered in a written contract? Are you paying the person benefits (sick, vacation, health/dental)? Is the relationship long term and is the work output consistent with the normal course of business? Example, if you are a school, the main course of business is to provide instruction. Does the individual in question provide instructional services? If so, they should be classified as an employee. However, if this same individual owns a corporation which provides tutoring services off-site at their own place of business the same rule would not apply. The key is to ask yourself what degree of control do you have over this individual and their work product.

  2. Financial - Are the business functions of the person’s work product controlled by your organization? Do you reimburse their expenses and do you provide their supplies? If yes, they should be classified as an employee.

  3. Behavior - Does your business have control over the individual and how they do their job? If yes, they should be classified as an employee.

It’s important to consider all factors when determining the relationship status. Sometimes you may find that this is not an easy task because some indicators may suggest that both apply.

When in doubt contact our office we would be happy to help! 916-827-1155



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