Common Law Guidelines for Contractor vs Employee

The U.S. government has common law guidelines related to worker status, which affects whether or not you can be paid as an independent contractor a 1099 tax basis. For federal tax purposes, three common law guidelines help to determine whether a worker is an independent contractor or an employee: Behavioral Control, Financial Control, and the Type of Relationship of the parties.

Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means. If a client tells the worker when to work, where to work, and/or how to do the job, they are demonstrating behavioral control.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. This includes:

  • The extent to which the worker has unreimbursed business expenses (e.g., web hosting, bookkeeping expense, rent)
  • The extent of the worker's investment in the facilities or tools used in performing services (e.g., custom methodologies, office space, assessment tools)
  • The extent to which the worker makes his or her services available to the relevant market (i.e., marketing)
  • How the business pays the worker (e.g., by time and materials versus by deliverable or milestone)
  • The extent to which the worker can realize a profit or incur a loss.

Type of Relationship covers facts that show the type of relationship the parties had. This includes:

  • Written contracts describing the relationship the parties intended to create
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company

For more information from the IRS, see Publication 15-A, Employer's Supplemental Tax Guide, or Publication 1779, Independent Contractor or Employee.

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