The IRS uses a 20-factor common-law test to determine whether a worker should be classified as an independent contractor or an employee. Employers and workers who are unsure can also file Form SS-8 with the IRS to request an official determination.
To better understand the differences, here are some common real-life scenarios.
Example 1: Independent Contractor – John the IT Consultant
John is hired by a law firm to troubleshoot their computer network. His IT support company and the law firm sign a contract with a specific goal: fixing the network.
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John brings one of his own employees to help.
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He uses his own tools.
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He works on another project for a medical clinic at the same time.
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He chooses his own schedule.
👉 Because John controls how and when he works, he is an independent contractor. If he were an employee, he would not be able to subcontract the work, use his own equipment, or freely manage his schedule.
Example 2: Employee – Mike the Mechanic
Mike works at an auto shop and is paid a flat rate per job.
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He follows a regular schedule set by the shop.
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The shop provides most of his tools.
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He works on tasks as directed by his supervisor.
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He is paid every two weeks.
👉 Mike is an employee because he works under the shop’s control. His employer withholds taxes and pays for his benefits.
Example 3: Employee – Sarah the Sales Representative
Sarah works for a software company as a full-time sales representative.
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She reports to her sales manager twice a week.
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She works 40 hours per week.
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She uses a company car and receives paid training.
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Her business expenses are reimbursed.
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She is paid a base salary plus commission.
👉 Sarah is an employee because she works for one company, follows her manager’s directions, and receives the tools and resources she needs from her employer.
Key Takeaways
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Independent contractors usually control how, when, and with what tools they work.
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Employees usually follow an employer’s schedule, supervision, and direction.
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Misclassification can lead to penalties, back taxes, and compliance issues.
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Employers can file Form SS-8 if they are unsure about a worker’s classification.
📞 Need help determining worker classification for IRS purposes? Call us at 480-706-6474 for expert guidance.