Internal Revenue Service Guidelines

An employer must generally withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee but not to independent contractors.

To determine whether an individual is an employee or an independent contractor examine the following:

1) Behavioral control

Does the business have a right to direct and control the worker with regards to?

  • When and where to do the work.
  • What tools or equipment to use.
  • What workers to hire or to assist with the work. Where to purchase supplies and services.
  • What work must be performed by a specified individual.
  • What order or sequence to follow.


2) Financial control.

Does the business have a right to control the business aspects of the worker’s job with regards to?

  • The extent to which the worker has unreimbursed business expenses.
  • The extent of the worker’s investment.
  • The extent to which the worker makes his or her services available to the relevant market.
  • How the business pays the worker.
  • The extent to which the worker can realize a profit or loss.


3) Type of relationship.

Facts that show the parties’ type of relationship include:

  • Written contracts describing the relationship the parties intended to create.
  • Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
  • The permanency of the relationship.
  • The extent to which services performed by the worker are a key aspect of the regular business of the company.


Department of Labor Guidelines

In order for the Fair Labor Standards Act’s minimum wage and overtime provisions to apply to a worker, the worker must be an “employee” and not an “independent contractor” of the employer. The FLSA has the broadest definition of employment under the law.

The following factors are generally considered when determining whether an employment relationship exists under the FLSA

  1. Is the work performed an integral part of the employer’s business?
  2. Do the worker’s managerial skills affect his or her opportunity for profit and loss?
  3. What are the relative investments in facilitates and equipment made by the worker and the employer?
  4. What is the worker’s skill and initiative level?
  5. How permanent is the worker’s relationship with the employer?
  6. What is the nature and degree of control of the employer over the worker?