When to Classify a Worker as an Independent Contractor

Determining whether a worker can be classified as an independent contractor is a critical step for organizations that want to remain compliant and avoid misclassification risk. Understanding the differences between employees and independent contractors helps ensure that working relationships are structured correctly from the start.

A worker can be classified as an independent contractor based on factors such as the level of control over their work, their independence, and whether they operate as their own business. These factors help define whether a worker is truly independent or functioning as an employee.

By understanding these criteria, organizations can make more informed classification decisions, reduce compliance risk, and build more effective independent workforce strategies.

What is the Difference Between an Independent Contractor and an Employee?

The key difference between an independent contractor and an employee is the level of control and independence in how work is performed.

Independent contractor is a legal term for workers who are not considered to be full-time employees under the law. Independent contractors may refer to themselves as freelancers, consultants, self-employed professionals, side-giggers, etc. The big difference between independent contractors and your typical W-2 employee is that independent contractors are their own business entities. They pay their own taxes, provide their own benefits, and submit invoices for work completed. 

Independent contractors provide specialized knowledge or skills to a client project or task. They are responsible for how, when, and where they complete the work outlined in their contract. An employee, on the other hand, is typically guided by a manager and receives some level of training for their job. 

When engaging independent contractors, it is important to have a general awareness of the differences between independent contractors and employees so that you can remain compliant and minimize the risk of misclassification.

There are many different laws, tests, and guidance documents that govern whether a worker should be classified as an employee or an independent contractor. These nuances can quickly become confusing, and sometimes even contradictory, for businesses.

Learn more: Worker Classification Tests: DOL, IRS, State Tests for Classifying Workers

Worker Classification: Three Key Points to Consider

Several key factors determine whether a worker can be classified as an independent contractor.

1. How much control do you have over the worker?

One of the most important factors in determining independent contractor status is how much control the company has over the worker. Employees work for a single employer. That employer can determine what work the employee does, how they do it, and when they do it. For example, a manager has a certain degree of control over the hours, location, and type of work an employee is responsible for. With independent contractors, it is important to be highly aware of this degree of control.

IRS classification of independent contractors is a bit different. Independent contractors are their own business entities and can choose when, where, and how they complete the work they are contracted for.

Aside from behavioral control—dictating how and when work is done—employers must also be aware of financial control. Unlike employees, it is common for independent contractors to be reimbursed for certain expenses they incur for their project work. Independent contractors also tend to be paid a flat fee for their work rather than a regular wage in exchange for working a certain period of time, like an employee.

Less control generally indicates an independent contractor relationship, while more control suggests employee status.

2. What type of work are you hiring the worker to complete?

As a general rule of thumb, it is best to engage independent contractors for defined projects and hire an employee for ongoing business needs. A project is something that has a specific start and end date, defined success metrics, and agreed-upon deliverables. An ongoing business need focuses on the core goals of your business.

If employees are already performing the same work you want to engage an independent contractor to do, this is a red flag. In most cases, independent contractors should be providing skills or experience that are not a core part of your business.

3. Do you need specialized expertise or just another helping hand?

Independent contractors are experts in their field of work and have built their businesses around their skills. When deciding whether to engage independent talent or hire an employee, consider whether the work you need to be done requires a specialized set of skills. If your project is more generalized work that existing employees have the skills to complete, the work should be assigned to an internal employee or a new hire if your workforce is at capacity.

Keep in mind that independent contractors are generally responsible for providing any tools or materials they need to complete their work, and they should not require additional training to start a project. When hiring an employee, on the other hand, it is expected that they will receive some sort of training for their job and are given a place and tools to do their work.

Check out: Should I Hire a 1099 Contractor or W2 Employee? 6 Questions to Ask

In general, independent contractor classification depends on control, independence, and how the working relationship is structured.

Classification FAQs

What determines if a worker is an independent contractor?
A worker is classified as an independent contractor based on factors like control, independence, and whether they operate as their own business.

What is the main difference between an employee and an independent contractor?
The main difference is control—employees are directed by an employer, while independent contractors control how they complete their work.

Why is worker classification important?
Incorrect classification can lead to legal penalties, tax issues, and compliance risks.

Do independent contractors control their work?
Yes, independent contractors typically control when, where, and how they complete their work.

The information provided in the MBO Blog does not constitute legal, tax, or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation, or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.