Employee vs. Independent Contractor Determination

Tax Professionals' Resource
June 4, 2012 — 1,697 views  
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Filling out tax forms can be confusing, even for the most diligent and knowledgeable person. One of the most commonly misconstrued aspects of a corporate or personal tax document is the designation of employee vs. independent contractor. Numerous characteristics must be scrutinized to determine which category a worker falls under, and some of the more important differences are discussed below.


The concept behind an employee in the traditional sense is much simpler than that of an independent contractor. According to the Internal Revenue Service (IRS), three concepts govern the relationship between businesses and their workers. These are behavioral control, financial control and type of relationship.

Behavioral control means that the company in question provides direction and instruction to a worker on how to perform his or her job. Essentially, although many tasks fall underneath the discretion of an individual, a business still has the option to dictate daily responsibilities, which establishes behavioral control.

Financial control refers to payment. To meet this category, a corporation must simply define its right to monitor, change or terminate financial compensation.

Finally, type of relationship is the most abstract of the three qualities. This factor designates how employees and businesses view one another. Therefore, if an employee in question acknowledges a business relationship, then he or she is considered an employee.

If these three conditions are met by both the company and the worker, the term employee may be used.

Independent Contractor

The definition of an independent contractor is much more complex. According to Illinois State University, there are 20 different factors that must be met for the IRS to officially recognize someone as an independent contractor. These mainly relate back to the type of relationship clause defined above.

For example, job training in software and other operational tasks suggests a more employee-oriented relationship, considering the person in question literally has to be brought up to speed by someone employed by the company. However, if a person is providing a service that is already known, they might be considered a contractor instead of an employee.

The more structured a person's responsibilities are, the more likely it is the IRS will view them as an employee. Working regular hours, commuting to an office and using company tools and financial assets are all things that are considered typical of traditional employees. In contrast, working from home at one's own pace and schedule with individual tools would be much closer to the practices of an independent contractor.

Tax Professionals' Resource