Contractor or Employee?

Hiring independent contractors

This setup is widely spread across all company sizes. Hiring contractors has multiple benefits: the possibility to employ foreign workers or short-term workers, cost per employee savings, and the ease of contractor relationships.

Although it's the easiest to set, it can lead to tax evasion charges and IRS audits when local laws and different setups for contractors are not well understood. We will talk about all the aspects individually in the sections below.

Independent contractor or employee: Classification process

A company must weigh all the factors when determining whether a worker is an employee or an independent contractor. Some factors might indicate that the worker is an employee, while others suggest that the worker is an independent contractor. According to the IRS, there is no set number of factors that make the worker one or another, and no one factor stands alone in making this determination. Let's take a look at the classifications separately.

Who is an independent contractor?

Independent contractors are people who offer their professional services to clients. They are usually self-employed owners of small businesses that you hire for a fixed period of time or on a project basis. Every country has its own regulations that define their independence. According to the IRS, "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."

If the payer in any way controls the work in terms of working hours or activities, the relationship might be viewed as employment. We've written in-depth about the differences between contractors and employees, so make sure to check out that article as well.

Who is an employee?

On the opposite, if the company controls the performance as a whole, the service provider is considered an employee. On top of that, if the company does expenses reimbursement, provides tools, conducts training, offers paid vacation and benefits, etc., the service provider is most likely an employee. In cases where there is an employment contract, the worker's status is evident, but independent contractors can start resembling employees in some scenarios. In those cases, there is a need to determine their status.

How to determine if a person is an independent contractor or not?

As we already mentioned, each country regulates the factors determining the relationship between the payer and the service provider. In the United States, there is a test called Reasonable biases or 20-Factor test, which gives you an overview of what an independent relationship looks like.

If you are not sure and need additional support, you can fill in Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) and request the IRS to review your case. Keep in mind that it can take at least six months before you get a determination and that each country has its local regulations that might be different from those in the US.