Labor classification splits workers into two categories: Employees and Independent Contractors. Proper classification of workers is an important part of paying for labor and there are several pieces to consider when making this determination.

Determining Proper Classification

The IRS has a set of common law rules to consider when determining if an individual is an Employee or an Independent Contractor. These rules are used to determine the business relationship that exists between a company and the person performing services for that company.

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These aspects include things like how a worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Is the relationship ongoing and is the work performed for a key aspect of the business?


This is the major difference in workers that many businesses focus on. Generally, you must withhold and pay income taxes, social security and Medicare taxes, and pay unemployment taxes on payments to employees.  You do not generally have to withhold or pay taxes on payments to independent contractors.

Consequences of Misclassification of Employees

If you classify an employee as an independent contractor and don’t have a reasonable basis for doing so, you may be held liable for employment taxes for that worker and may possibly face penalties.

Still unsure how to classify a worker or have questions?

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