To determine whether a worker is a W2 employee vs. an independent contractor, the IRS looks at several factors, but the most important factor is the amount of control the employer exerts over the worker’s behavior.
What this means is whether the employer directs or controls how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
The behavioral control factors fall into several categories:
Type of instructions given;
Degree of instruction;
Evaluation systems; and
Types of Instructions Given. A W2 employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
When and where to do the work;
What tools or equipment to use;
What workers to hire or to assist with the work;
Where to purchase supplies and services;
What work must be performed by a specified individual; and
What order or sequence to follow when performing the work.
Degree of Instruction: This means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is a W2 employee (and that the employer should be paying payroll taxes for that worker). Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Evaluation System: If there is a system in place that measures/evaluates how the work is performed, then these factors would point to a W2 employee.
Training: If the employer provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is a W2 employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
For more information, please contact Tuk Law.