This article will explain how the IRS defines an employee and independent contractor as an aid to company’s in determining the right category for its workers.
Tax Implications
One of the main situations a company encounters when hiring workers is the federal and state tax implications. Many of the tax implications will depend if the worker is an employee or independent contractor. Generally, an employee will be subject to employment tax withholding and a company is required to file several payroll returns.
Generally, an independent contractor is not subject to tax withholding and a company is required to file only annual information returns.
Relationship & Control
The relationship and control between the company and the worker are the main considerations for the correct classification.
The IRS states there are three types of control which must be reviewed.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- 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.)
- Type of relationship: Are there written contracts or employee type benefits (that is, pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
From a practical perspective, the less control you have of the worker’s pay, how the work is performed, when the work is performed, which tools are used to perform, the more probable the classification is an independent contractor.
On the contrary, if the company controls the schedule of the worker, how much the worker will be paid, how to perform the work, provides the tools, the more probable the classification is an employee.
Summary
There is not a specific formula which can be used to determine worker classification, though each company can take appropriate steps to assess the correct classification.
For further guidance, the IRS has published several articles:
https://www.irs.gov/newsroom/worker-classification-101-employee-or-independent-contractor
https://www.irs.gov/pub/irs-pdf/p15a.pdf
Written by: Abraham Brosig CPA, August 5, 2026
Disclaimer: The articles and insights in this journal are intended for general informational and educational purposes only. They do not constitute professional tax, legal, or accounting advice. Because tax situations vary and laws are subject to change, readers are strongly encouraged to consult with a licensed tax advisor or CPA in their specific jurisdiction before acting on any information contained herein.