Worker classification is one of the most important payroll decisions a business can make. Paying someone as a contractor may appear simpler, but the name placed on an agreement or tax form does not by itself determine the worker's status.
Why classification matters
Employees generally trigger payroll withholding and employer payroll-tax responsibilities. Misclassification can therefore affect payroll taxes, wage-and-hour rules, unemployment coverage, and other obligations.
Three broad areas the IRS considers
Behavioral control
Consider how much control the business has over what the worker does and how the work is performed.
Financial control
Consider who controls the business aspects of the worker's job—for example, investment in tools, reimbursement of expenses, and opportunity for profit or loss.
The type of relationship
Written agreements, benefits, permanency, and whether the work performed is a key part of the business can all be relevant.
Do not wait for an audit to review the issue
Classification should be reviewed before onboarding a worker and again when the relationship changes.