Is your worker an Independent Contractor (1099) or an Employee (W2)?
TLC wants to remind business owners that the penalties associated with misclassifying an employee can be very high. We urge every business owner to do the correct due diligence, as well as speak to an attorney about how to classify their workers. If you need to be connected to an attorney, please ask us at any time for a trusted referral.
TLC Employer Services is a leader in payroll services and therefore this question is asked often. Knowing each situation is different, we cannot tell you 100% how to classify your worker. What we can do, and what we did, is take the definitions by the IRS, create this test to help you determine how to classify your worker to help you in this process. This test and results are not legal advice and we urge you to speak to an attorney or fill out an SS8 with the IRS to know for certain how your worker should be classified. The SS8 form is provided at the end of this short test. The definition by the IRS and TLC Employers Test is based off of the Common Law Rules. These rules are broken down to these three categories: Behavioral, Financial, and Type of Relationship with the worker.
Click below to start the test. Remember - the questions and results are not legal advice and we urge you to speak to an attorney or fill out an SS8 with the IRS to know for certain how your worker should be classified.
A worker should be considered an employee and given a W2 when the business has the right to direct and control the worker.
Types of Instruction Given
An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
Degree of Instruction
The more control the business exercises over the worker, the more likely the worker is an employee.
Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
An independent contractor is not guaranteed to have a significant investment in the equipment he or she uses in working for someone else, but most of the time this is the case. There are no precise dollar limits that must be met in order to be a significant investment.
Independent contractors are more likely to have unreimbursed expenses than employees are. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for the business.
Opportunity for Profit or Loss
The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money is a good possibility he or she is an independent contractor.
Services Available to the Market
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
Method of Payment
An employee is generally guaranteed a regular wage amount for an hourly, weekly, and sometimes with commissions and/or bonuses. An independent contractor is usually paid by a flat fee per job. However, (you guessed it), this is not always the case.
Type of Relationship
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
A contract between two parties does not mean the IRS follows what is agreed upon within that contract. How the parties work together determines whether the worker is an employee or an independent contractor, not a document.
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors.
Permanency of the Relationship
If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period of time, this is generally considered evidence that the intent was to create an employer-employee relationship.
Services Provided as Key Activity of the Business
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.
Based off of your responses your worker could likely be an .
Please remember this is not legal advice and we recommend you speak to an attorney, or you can fill out Form SS8 for the IRS to specifically tell you how your worker should be classified. Click here for Form SS8.