Your New Worker: Employee or Contractor?

When your organization needs more help, you might be too busy and stressed to think about all the details. Worker classification — employee or a contractor — takes a back seat to more immediate concerns, like the worker’s start date and assignments. In reality, how your workers are classified should be your first consideration because it impacts your cost.


What is Worker Classification?


Workers can be employees or independent contractors. Determining worker classification comes down to the amount of control over the worker and the work in three categories:


  1. Behavioral: Do you control what the worker does and how the job is done? For example, who determines work hours and how the work will get done? If you set work hours and procedures, your worker is an employee.


  1. Financial: Do you provide the infrastructure for the worker to perform the job, such as a work space, computer, and other tools? Your worker is an employee.


  1. Relationship: Is the work permanent or temporary? Are employee-type benefits provided? Permanent workers who receive employer-provided benefits are employees. Temporary workers could be employees or independent contractors, depending on your level of control under #1 and #2.


How Does Worker Classification Impact Cost?


Costs can be higher when workers are classified as employees vs. classifying them as contractors. Employee wages are subject to employment taxes, the employer portion of social security taxes and all federal and state unemployment taxes. Employees may also get employer-provided benefits, such as insurance. An independent contractor is responsible for paying all of her or his social security taxes and benefits. Compare the total cost of each worker classification to know how your decision will impact your bottom line.


What If a Worker is Misclassified?
Even if the costs are higher, workers whose job duties are controlled by the organization must be classified as employees. No choice. Organizations that misclassify employees as independent contractors to save on employment taxes may be held liable for unpaid employment taxes, plus interest and penalties. Making a worker classification error, accidentally or intentionally, can get pretty expensive.


The IRS has more helpful details at Still have questions? Consult a qualified tax professional.

Employee or Contractor?

Organizations add new workers for a variety of reasons – growth, seasonal spikes, or special projects. Regardless of the circumstances, it’s important to understand whether a new worker is classified as an employee or a contractor.


So what is “worker classification” and how is it determined?


Two common worker relationships are employees and independent contractors. The business relationship between the organization and the worker performing services must be defined before paying for services. The determining factor for worker classification relates to the amount of control over the worker and the services performed.


An organization’s control over a worker falls into three categories:


  1. Behavioral: Does the organization control or have the right to control what the worker does and how the worker does his or her job? For example, who establishes work hours and procedures?


  1. Financial: Are the business aspects of the worker’s job controlled by the organization? For example, who provides work space, tools, and supplies?


  1. Type of Relationship: Is the business relationship permanent or temporary? Is the work performed a key aspect of the business? Are employee-type benefits provided?


Classifying workers as contractors vs. employees can reduce organizations’ employment expenses. Employee compensation is subject to employment taxes, such as the employer portion of social security taxes and unemployment taxes. Independent contractors are responsible for paying all of her or his social security taxes on the net income from self-employment.


What happens if a worker is misclassified?
Organizations that classify an employee as an independent contractor to save on employment taxes may be held liable for that worker’s employment taxes. Past due taxes accrue daily interest and penalties, which can really add up. Accurately classifying workers avoid costly tax issues down the road.