Contractor or employee: how the IRS decides

When you pay someone to work for your business, they are either an employee or an independent contractor. The IRS decides which by looking at how you work together, not at the words in your contract.

The answer matters. For an employee, you generally withhold income tax, pay Social Security and Medicare tax, and pay unemployment tax. For a contractor, you generally do none of these (IRS).

The short version

• A worker is an employee if you have the right to control what they do and how they do it.
• A worker is a contractor if you control only the result (Publication 15-A).
• The right to control counts, even if you never use it.
• A contract, a job title or the worker’s wish does not decide it.
• No single fact decides it. You look at all the facts together (IRS).

Words to know

• Independent contractor: a person in business for themselves, who decides how to do the work.
• Employee: a person whose work the business has the right to direct and control.
• Payroll: the system that withholds and pays employment taxes for employees.

The three kinds of facts

The IRS sorts the facts into three groups (Publication 15-A).

Behavioral control. Do you tell the worker when, where and how to work? Do you train them to do it your way? If yes, that points to an employee.

Financial control. Does the worker pay their own costs, use their own tools, work for other clients and risk a loss? That points to a contractor. A regular wage by the hour or week usually points to an employee. A flat fee for a job usually points to a contractor.

Type of relationship. Do you give benefits such as paid leave or insurance? Is the job open-ended? Is the work a key part of your business? If yes, that points to an employee.

An example

Nadia owns a small bakery. (She is an example, not a real person.) She needs two people: a designer for a new logo, and help at the counter on busy mornings.

Theo is a contractor. Nadia gets a Form W-9 from him. She pays him $2,400 by bank transfer in 2026. That is more than the $2,000 limit for payments made in 2026, so she sends him a Form 1099-NEC (IRS).

Jess is an employee, even though she asked to be paid “on a 1099”. Nadia needs payroll for her.

What changes

When you cannot tell

The business or the worker can file Form SS-8 to ask the IRS to decide. It may take at least six months to get an answer (IRS). Most small businesses ask a tax professional first.

If the facts are mixed, write down how you weighed each one. The IRS suggests you document each factor you used (IRS).

Your state and the U.S. Department of Labor can use their own tests. Check your state’s rules too.

A Righto tip

Righto keeps a record of each contractor and what you paid them. Its contractor payment report gives each total for the year, so in January you can see who may need a 1099. Righto does not decide who is a contractor, and it does not run payroll.

Common questions

If a worker signs a contractor agreement, are they a contractor? Not always. The contract is one fact. If you control how the work is done, they can still be an employee.

Can someone be a contractor if they work only for me? Yes, but it is one fact that points to an employee. The IRS looks at all the facts.

Can I pay part-time help as contractors? Part-time work does not make someone a contractor. The same tests apply.

What to do now

1. Before you pay anyone new, write down who sets the hours, who supplies the tools, how they are paid and when the job ends.
2. If most answers are yours, plan for payroll.
3. If most are theirs, get a W-9 and put the agreement in writing.
4. Look again at anyone you pay often as a contractor. Ask a tax professional if you are not sure.

Righto is free, easy to use and needs no account.

Sources

• Independent contractor (self-employed) or employee?, IRS
• Publication 15-A, Employer’s Supplemental Tax Guide, IRS
• Instructions for Forms 1099-MISC and 1099-NEC, IRS