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How to Classify a Worker

By September 8, 2022January 31st, 2024blog

In the United States, there are several options for worker classifications. However, there are only two major options, employee or independent contractor. Learn more about how to properly classify a worker and safely navigate the line.

Independent Contractor & Employee Benefits

Treating them as independent contractors means that you don’t have to pay Social Security, Medicare, or certain other federal and state taxes. Also, you don’t have to worry about sending a payroll or filling a W2 at the end and other tedious processes when dealing with an independent contractor.

On the other hand, an employee means you have reliable support for the long term, years or decades maybe. Furthermore, they do the job as you want. They are also available for multiple jobs and operations and, as a result, provide stability for the business. It is crucial to determine how the worker you bring to your organization is classified because the taxes always count at the end of the day. The IRS scrutinizes individuals who treat employees as independent contractors to reduce their taxes.

Determining Factors

One of the critical factors the IRS considers when you classify an individual as an independent contractor or an employee are the factors an employer controls and how they control it. They also evaluate your rights to control the details and want to see how the workers’ services are controlled. In general, they want to see how much control you have over the workers’ ability to get a job done, how they get the job done, and the tools used.

When considering the options to classify a worker, you must consider three key factors. These factors are behavioral control, financial control and relationship between the parties.

Behavioral Control

Let’s begin with behavioral control, as the business, the IRS wants you to ask, “does the business control or have the right to control what the worker does and how it is done?” For instance, suppose you hire a worker and tell them to wash a car for a client. They should wash the body, the windscreen, the rear window, the side mirrors, the rim and the interior in that particular order, and you hand them the tools to use in that car. As the business you controlled how the job is done and provided the necessary tools to complete the job. In this case the worker would be considered an employee.

Financial Control

The next factor to consider is financial control. Does the business directly or indirectly controls the financial and business aspect of the workers’ job? Does the business handle how the workers are paid? Does the business reimburse the workers for expenses made? Does the business provide tools and supplies to support the worker in accomplishing a task? If, as a business owner, your answer to these questions is yes, that worker is considered an employee. An independent contractor provides tools for their jobs, has a flexible work schedule and determines how the job is done.


Now, to the last factor, the relationship between the parties. Is there a contract between the company and the worker? Does the company provide vacation pay, insurance plans, and similar benefits? If the company or organization offers these benefits to workers, they are employees rather than independent contractors. Furthermore, you must ask if the worker will continue working additional jobs after this one is complete or if the worker will complete this job and discontinue the working relationship. If the working relationship is discontinued following the job, they are most likely an independent contractor. However, they can be classified as an employee if they continue to working following a specific job.

Sometimes a business owner may misclassify a worker to save money on taxes. The common misclassification, in this case, is classifying the worker as an independent contractor instead of an employee.

However, if the IRS discovers this, they audit you and make you, the business owner, liable for that worker’s employment taxes. This means you must pay your portion for the benefits the worker is entitled to and their portion too. For example, if you pay a worker $10,000, you will be subject to $1530, which is a 15.3% tax punishment not to include penalties, interest, failure to file fees, and more.

The IRS offers a voluntary classification settlement program. This program is dedicated to business owners who discovered that they misclassified a worker all along. Here, you can go and voluntarily reclassify this worker as an employee. You must also fill out the necessary forms and meet the eligibility criteria. However, the IRS will still punish you but a reduced penalty. The IRS calls it partial relief. This program benefits the business owner on the funds they may owe.


It is important to consider all three of these factors when determining how to properly classify a worker. Consult your payroll company and tax professional.