Who Is an Employee?

April 13, 2006

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Anyone who performs services is an "employee" if the one for whom services are performed can control what will be done and how it will be done. This is true even when you give the worker quite a bit of freedom of action. What matters is that if you have the legal right to control the method of the services — the how, when, and where — rather than just the results, the individual meets the IRS common law rule and is going to be considered your employee. If not, the individual is classified as an independent contractor and is not your employee.

More specifically, an individual is an employee when he or she:

maintains a continuous relationship with an employer
is subject to the control of the employer, even if the employer chooses not to exercise the control
performs the work personally and receives required training, tools, supplies, etc.
works hours and locations that are assigned by the employer
qualifies for company benefit plans

The IRS has a 20-factor test that it uses to determine whether a worker is an independent contractor or is really an employee in disguise. The factors can carry different weights, depending on the factual situation. Generally speaking, if the worker would be considered an employee under at least 10 of the factors, you should treat him or her as an employee.

If in doubt, look at IRS Form SS-8, which is the form used by the IRS to determine individual status for purposes of income and employment taxes. You can use it to determine whether workers are employees. The IRS takes a strong stand on misclassification of workers as independent contractors when they are really employees and frequently imposes back taxes, penalties, and interest equal to tens of thousands of dollars when workers are improperly treated as independent. To ensure independent contractor status, for example, an employer must allow total control over the performance of the job by the contractor.

If you are waiting for a determination from the IRS, a worker should be treated as an employee until the determination is made. All applicable taxes should be deducted and paid while the worker is in an employee position. You can petition for a refund if the worker turns out to be an independent contractor after all.