IRS Advice on Independent Contractors vs. Employees

To determine whether an individual is an employee or independent contractor under the common law, the relationship of the worker and the business must be examined. Consider all evidence of control

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. Refer to IRS Publication 15-A, Employer's Supplemental Tax Guide, for additional information.

Who is an employee?
A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works six days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission, and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Thus, Donna is an employee of Bob Blue.