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Know How To Distinguish Independent Contractors

  Sanjiv Gupta CPA  Published 
Know How To Distinguish Independent Contractors

Independent contractors are those people or businesses who provide freelance services to other companies. As they are not qualified as employees of a company, the independent contractors are not liable to enjoy any employment taxes or benefits. As employers can save a lot of employee’s taxes and other benefits with independent contractors, they classify many employees as independent contractors to save money on payroll taxes. To stop this practice there are certain factors that can distinguish an independent contractor from an employee.

Understanding The Concept Of Independent Contractors


Having a clear understanding of the concept of independent contractors is the first element to distinguish between them and an employee. An independent contractor can be a person or a company that offers its services to another company. What makes them different is that these contractors follow their own schedule and work as per their own free will. So the employer company has a limited hold on these independent contractors. The employer companies cannot regulate which jobs the contractors accept or how much pay they will demand and when they will work on a certain project.


Another point of difference between independent contractors and employees is that the independent contractors will usually bring in their own supplies, or have some kind of investment in equipment. The employer company also is not liable to provide any insurance or any compensation to them.


Determining Ways To Identify Independent Contractor

As hiring independent contractors relieve the employer of giving payroll taxes and other liabilities, many companies list a portion of their employees as independent contractors to save taxes. Some companies also outsource their work to independent contractors to achieve the same goal.  Therefore, the IRS has the knowledge of a few factors with which they can identify a contractor from an employee.


  1. The first thing that IRS notices is the way the employers exert their authority on the worker. If it is an independent contractor the employer will only give details about the work but if it is an employee, the employer can exercise more control over the way he works, how it is ultimately carried out and his performance. So if the employer is giving out a more defined and whole set of instructions the worker is considered as an employee. Whereas if the instructions are limited and the worker has the freedom to execute a project on his own terms then he is considered an independent contractor.
  2.  IRS will consider any worker to be an employee if the employer can regulate the way the worker gets paid or if it is the employer who provides all the tools and supplies. Whereas if the worker is paid in accordance with the job done, can offer his services to other companies at the same time or has a considerable amount of investment in the supplies used for the job then the worker is considered as an independent contractor. In addition, if the worker faces profits or losses in a certain work then he is an independent contractor.
  3. If the worker and the employer have a written contract and if the employer is liable to pay insurance, casual leave and sick leave then the worker is considered to be an employee. Another way to identify an independent worker is to check if the worker expects to work for the employer only for a specific period of time then the worker can be classified as an independent contractor.


These are the factors through which the IRS distinguishes an employee from an independent contractor. It is crucial for the employer to classify his workforce properly as a miscalculation can make one liable for penalty and payment of all possible dues.