- California Test for Employment
- Internal Revenue Service Test for Employment
- Statutory Employees and Nonemployees
When you hire workers, they are either independent contractors or employees, and understanding the difference is crucial when it comes to recordkeeping and tax reporting. Making the determination can be a frustrating experience because the answer is not always clear. And because making the correct determination is critical, it is not always safe to rely on an "industry standard" or " custom" that automatically treats certain kinds of workers as independent contractors. To add to the confusion, the California test and the federal test to determine whether a worker is an employee or an independent contractor differ in some cases.
To determine if a worker is an independent contractor or an employee, look at the main test and the ten secondary factors.
- Main Test
Does the principal (you) have the right to control the manner and means in which the worker carries out the job? The right of direction and control, whether or not exercised, is the most important factor in determining an employment relationship. The right to discharge a worker at will and without cause is strong evidence for the right of direction and control. When it is not clear whether you have the right to direct and control the worker, you must look further into the actual working relationship by weighing the ten secondary factors.
- Secondary Factors
Depending on the type of relationship and the services performed, each factor varies in importance. Consider each factor independently, then consider them as a whole:
- Is the worker engaged in a distinct trade or occupation? Does the worker make his or her services available to the general public? Does the worker perform work for more than one firm/company at a time? Does the worker hire, supervise, or pay assistants? Does the worker have a substantial investment in equipment and facilities?
- Is the work done without supervision? In the geographic area and in the occupation, is the type of work usually done under the direction of a principal without supervision?
- Is the work highly skilled and specialized? Is the worker trained by the principal? Does the worker personally perform the services?
- Does the principal furnish/provide the tools, equipment, materials, supplies, and place of work? Does the worker perform the services on the principal's business premises?
- Are the services provided on a long-term or repetitive basis?
- Method of payment - Is the worker paid based on time worked or on completion of the project?
- Are the services an integral part of the principal's business?
- What type of relationship do the parties believe they are creating?
- What is the extent of actual control by the principal? Does the worker have the right to terminate the relationship without liability? Does the principal provide instructions on how to do the work? Does the principal establish the work hours or the number of hours to be worked? Does the principal require the work to be done in a particular order or sequence? Does the principal require oral or written reports from the worker?
- Is the work performed for the benefit of the principal's business?
To determine if a worker is an independent contractor or an employee, consider behavioral control, financial control, and relationship of the parties:
- Behavioral Control - Generally, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done.
- Financial Control - Who directs or controls the business aspects of work? Independent contractors are in business for themselves, offer their services to the public, and have a significant financial investment in the facilities used in performing services. They can realize a profit or incur a loss.
- Relationship of the Parties - How do you and the worker perceive your relationship? A permanent relationship and worker benefits generally indicate an employer-employee relationship. However, the substance of the relationship determines whether your workers are employees, not a job title or written contract.
The IRS also provides information about independent contractor vs. employee on their website.
Certain categories of workers, including corporate officers, are considered by law to be statutory employees: other categories are exempt employees and treated like independent contractors. See Employer's Supplemental Tax Guide (IRS Publication 15A), and California Employer's Guide (DE 44) for more information.
If you're confused about whether your bookkeeper, office handyman, or neighbor's son is an independent contractor or employee, you can ask for help from the IRS or EDD to figure this out. You can complete an Employment Determination Guide (DE 38) to help you make a determination yourself; for a written determination, complete a DE 1870, Determination of Employee Work Status for Purposes of State of California Employment Taxes and Personal Income Tax Withholding, and send it to EDD. You can complete an IRS Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Tax and Income Tax Withholding, and send it to the IRS for a written determination.