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How the IRS distinguishes between employees and contractors

On Behalf of | Oct 9, 2015 | Closely Held Businesses |

One of the major shifts in American employment patterns that has affected businesses in Ohio as well has been the move of companies away from hiring employees and toward relying on independent contractors. There are a number of practical reasons for this change: employers do not normally extend employee benefits to contractors, contractors have more flexibility in their work schedules and weekly hours, it can be easier to release a contractor than to fire an employee, and tax advantages for the employer.

Wrongly categorizing an employee is a contractor can result in serious tax consequences for the employer. In cases of doubt, in addition to consulting with the IRS – or if the IRS is challenging your classification of a worker’s status as a contractor – you may wish to consult with a law firm that practices in business and employment law matters for assistance.


The trend towards using contractors has not escaped the notice of the Internal Revenue Service, especially when it comes to the potential for some employers to try to skirt their tax obligations normally connected with employees by reclassifying them improperly as contractors. This can lead to disputes between the IRS and an employer concerning how to definitively determine the difference between the two. The IRS, for its part, has established criteria that it uses to decide the issue. These criteria fall into three basic categories:

Behavioral control: does the employer actually control or have the right to control the activities of the worker, and how he or she performs the work?

Financial control: does the employer have control over how the worker is paid, and the tools and equipment that are provided to the worker, and so on?

Relationship control: what type, if any, contracts will relationship exists between the worker and the employer? Does the relationship include providing benefits to the worker such as insurance and pension benefits?

No one of these three criteria is determinative in answering the employee-or-contractor question. The IRS considers all three to reach its decision. It also provides a form – the SS-8 – which workers or employers can use to request the IRS to make a formal determination of the question.


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