Many founders bring in help long before they feel ready to become an employer. Hiring someone for deliveries, bookkeeping, or seasonal work raises an early question: is this person an independent contractor or an employee? The answer affects taxes, paperwork, and legal risk, and the label you choose is not what decides it.
How the IRS looks at it
The IRS says the facts that matter fall into three categories: behavioral control, financial control, and the relationship of the parties. Its Publication 1779 stresses that it is very important to consider all the facts, and that no single fact provides the answer.
Behavioral control
This asks whether the business has the right to direct how the work is done. An employee is generally subject to the business’s instructions about when, where, and how to work, according to the IRS’s behavioral control page. Training on how to do the job is strong evidence of an employer-employee relationship, and ongoing training is even stronger. Independent contractors ordinarily use their own methods.
Financial control
This looks at who controls the economic side of the job. The IRS’s financial control page says an employee is generally guaranteed a regular wage for an hourly, weekly, or other period, while an independent contractor is usually paid a flat fee for the job. Hourly pay is common for contractors in some professions, such as law. An independent contractor often has a significant investment in equipment, but the IRS notes there are no precise dollar limits, and a significant investment is not necessary for contractor status.
Type of relationship
The IRS’s type of relationship page makes several points worth remembering:
- A contract that calls someone an independent contractor is not enough. The IRS is not required to follow it, and how the two parties actually work together is what counts.
- Employee benefits such as insurance, pension plans, and paid vacation or sick days are generally not given to contractors. Their absence does not automatically make someone a contractor.
- Hiring someone with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence of an employee relationship.
- If a worker’s services are a key aspect of your regular business, that also points toward employment.
Two illustrations
These are made-up examples, not rulings. A neighbor who paints your shop for a flat fee, brings their own tools, and decides how to do the job looks more like a contractor. A part-time worker who follows your schedule, uses your equipment, and learns your methods looks more like an employee. Real situations are usually less tidy, which is why the IRS asks you to weigh all the facts.
Why it matters
The IRS says that classifying an employee as an independent contractor without a reasonable basis makes an employer liable for employment taxes, as described in its fact sheet on worker classification. Some employers with a reasonable basis may qualify for relief. The IRS also says you need an EIN if you have employees, so see how to get an EIN. Your state may apply its own rules to worker classification, so check with your state labor or workforce agency too.
Before you hire
- List the tasks you need help with and how often.
- Decide how much control you need over when, where, and how the work is done.
- Ask a counselor or accountant to review your plan. Our guide to free business help for new founders explains where to find one.
- Understand the tax side, starting with our small business tax basics.
- Set aside room in your budget for the true cost of help. Our guide to knowing your numbers can help.
Your next step
Write down the first task you want help with, then answer three questions about it: who decides how it is done, who supplies the tools, and how long you expect the arrangement to last. Bring those answers to a counselor or accountant before you make an offer.