Why States Care A Lot
State agencies watch this area closely because some companies try to sidestep payroll taxes and employment laws by slapping contractor on people who work like employees. That is why there are tests at both the state level and the IRS, and they are not identical.
The Outside Pro With Their Own Tools And Clients
Think of a lawyer hired for a project. They have specialized expertise, their own equipment, and other clients. They pop in and out as needed. That pattern points to contractor status.
The Skilled Trade Fixing A Specific Problem
A plumber who brings their own tools, manages the work, serves many customers, and is not supervised minute to minute also fits the contractor profile.
Day In Day Out Supervision On Your Gear
If a person shows up daily, uses your computer, carries your badge, receives training from you, follows your step by step direction, and is paid a regular wage by you alone, that setup looks like employment.
The Single Customer Problem
When one company provides one hundred percent of the worker’s income, that also leans toward employee status.
Legal Rights And Employer Duties
If the government decides your contractor is actually an employee, that person gets the same legal protections as your other staff. Think anti discrimination laws, workers’ compensation, and payroll tax obligations that you must handle as the employer.
Quick Self Test For Busy Owners
Ask yourself these questions. If you answer yes to several, you may be looking at an employee.
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Do you control how the work is done rather than only the outcome
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Does the person use your equipment and work at your location on a set schedule
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Do you provide regular training and step by step instruction
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Do they earn a steady wage from you and not from other clients
If your answers tilt no across the board while the person brings their own tools, sets their methods, and serves many customers, you are closer to contractor territory.
Clarify The Work Product
Define the deliverables, timeline, and acceptance criteria. Focus on outcomes, not methods. That helps keep the relationship about results rather than control.
Keep Tools And Methods On Their Side
Contractors should use their own equipment whenever feasible. If your systems are necessary for security or access, limit that access and document why.
Avoid Employee Style Perks
Badges, company emails, and standing team meetings make the person look embedded. Use vendor portals and project hubs instead of staff channels.
Respect Their Business
Contractors should be free to take on other clients, set their schedules, and manage their work. That independence is a strong signal.
When To Call A Lawyer Or CPA
The tests vary across states and are different from the IRS standard. If your facts are mixed, get advice before you sign the deal or change a current setup. A short consult now can save payroll tax assessments and penalties later.
Bottom Line For Owners
Contractors control their methods, bring their own tools, and serve multiple clients. Employees are woven into your day to day, follow your process, and rely on you for pay and direction. Classify the relationship by how it actually works, not by what the agreement calls it, and you will avoid the most common traps.
Extra Resource
The transcript references a free small business legal resource with PDFs and videos for avoiding common problems.
Video Transcript
Why this matters for small businesses
When you’re scaling your business, hiring help is inevitable, but how you classify that help can make or break you. Is that person really an independent contractor or are they actually an employee in the eyes of the law? In this video, we’ll break down the key differences. The risks of misclassification and how to protect your company from costly, legal trouble.
Setting the stage for the discussion
If you’re hiring talent, this is a must know conversation. Let’s talk about independent contractors and employees. We’re gonna talk about the different types of independent contractors, but first, what is an independent contractor? Well. Anybody you enter into a contract with is independent if they’re not an employee or already in the company.
Contract relationships at a glance
So if you have a contract, you can have a contract with an employee or somebody outside, and we call them independent contractors. So an independent contractor relationship is most other relationships. There are a few exceptions. For example, a franchise agreement or a partnership agreement. In those cases, it is outside companies, but you don’t call ’em independent contractors.
Exceptions you might run into
You call ’em partners or franchisors, but. We will set that aside for now for purposes of this conversation. If your contract is not with an employee, it’s with an outside company that’s generally going to be an independent contractor. Let’s talk about that for a second because you might be thinking, I.
The in office contractor scenario
Well, I have a graphic designer who works in my office every day, and that graphic designer uses my computer and comes in every day and has maybe an employee badge or maybe an email account on your domain, and you give that contractor training from time to time. This graphic designer who you call an independent contractor, the law actually calls an employee.
Why states pay attention
In most states, the state governments are very concerned about employers trying to avoid all the employment laws and obligations under the law as an employer by just calling the workers independent contractors. So think about it. Say you’re an employer and you wanna have somebody come work for you.
Rights and costs pushed onto the worker
It’d be really nice if you could just say, Hey, you know what? I’m not gonna treat you as an employee. You don’t get all the employee rights like the right not to be discriminated against, workers’ compensation, payroll, tax paid in part by the employer. Instead, all of that is on you. You’re an independent contractor, you just provide services to me.
Government response and tests
The state governments throughout the United States have said, no, we’re not just gonna let employers call any worker an independent contractor. We’re gonna have a test. And I’m not gonna get too deep into that test because there’s a different test for the IRS than there is for the state. And every state has little differences, but let’s look at it this way.
Attorney with multiple clients and own tools
If you hire an attorney that’s somebody who has their own professional expertise, they have a lot of clients, they have their own training, they use their own equipment, and they just come in for a little project from time to time. That’s clearly an independent contractor. Similarly, you might hire a plumber.
Plumber who manages the work independently
The plumber comes in and occasionally does a couple projects for you, but that plumber. In this scenario has a lot of different customers, has his own equipment or her own equipment, and the plumber really manages herself. She does what’s needed and just solves the big problem, but you’re not there supervising her for all those reasons.
Day to day control and single source income
That plumber is clearly an independent contractor. But let’s say now you have somebody who comes into the office every day. It uses your computer. You supervise that person in detail. You say, Hey, do it like this. Not like that. You provide training to that person. That person gets a regular wage from you.
That person doesn’t work for a bunch of other customers. That person works for you. 100% of his wage or payment comes from you That. Is very much like an employee relationship. So even if you call it an independent contractor relationship, the federal and state government will look at that and say, no, that’s an employee.
Legal protections and employer duties
They are entitled to all the rights that other employees would get in your state and in your country. And here we’re talking about United States, so that’s rights against discrimination. Certain obligations you have as an employer for payroll, tax, and all sorts of other obligations you have regarding treating employees fairly, whereas you don’t have to treat independent contractors in the same way.
Free resource for small and mid size companies
Now, if you’d like to know more about how to avoid trouble like this. I have a free resource at AaronHall.com/free. I provide information for business owners of small to mid-size companies on how to avoid common legal problems. That includes a PDF. It includes videos talking about important issues. I’m Aaron Hall.
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