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Contractor or employee? The IRS checklist

Whether you send a 1099-NEC or a W-2 depends on how the work really happens, not what you call it. Answer 13 questions based on the IRS's three-part test to see which way a worker leans.

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Short answer

Under the IRS common-law rules, a worker is an employee if the business has the right to control what they do and how they do it, even if it never uses that right. The IRS weighs three groups of evidence together: behavioral control (instructions, training, evaluation), financial control (investment, unreimbursed expenses, profit or loss, method of payment) and the relationship (contracts, benefits, permanence, whether the work is a key part of the business). Employees get a Form W-2; independent contractors get a Form 1099-NEC.

  • A contract alone doesn't decide it: how the work is done does
  • Unsure? Either side can ask the IRS on Form SS-8
  • Misclassified workers can be fixed going forward through the VCSP (Form 8952)
  • Some states use a stricter ABC test

Last reviewed against the IRS independent contractor or employee pages and Publication 15-A.

Behavioral control Do you control how the work gets done, or only the result?

1. Do you tell them how, when or where to do the work, not just what result you want?

Directing the details of the work is the classic sign of an employee.

2. Do you train them in your own procedures or methods?

Businesses train employees. Contractors arrive knowing how to do the job their way.

3. Do you review how they work, not just whether the job got done?

Evaluating methods points to employment; checking results is normal with contractors.

4. Do they have to do the work personally, without hiring helpers or substitutes?

A contractor can usually send someone else or hire help.

Financial control Who carries the costs and the business risk?

5. Do they buy their own tools, equipment or workspace for the job?

A real investment in their own business points to a contractor.

6. Do they pay business expenses you don't reimburse?

Unreimbursed costs mean they bear business risk.

7. Could they make a profit, or lose money, on the work?

Employees don't lose money doing their job.

8. Do they offer the same services to other businesses or the public?

Marketing to other clients is what independent businesses do.

9. Are they paid by the hour, week or month rather than by the job?

Regular pay for time worked looks like wages; a flat fee per job looks like a contract.

Relationship How do you both see the arrangement?

10. Do you give them employee-type benefits such as insurance, paid time off or a retirement plan?

Benefits are strong evidence of employment.

11. Is the work expected to continue indefinitely, not for a set project or period?

Open-ended relationships lean toward employment.

12. Is the work a key part of your regular business, the thing you sell?

If they do what your company exists to do, that leans employee.

13. Is there a written contract calling them an independent contractor?

A contract helps show intent, but on its own it isn't enough: what actually happens matters more.

So far, this worker looks like—

    Answer the questions above. Leave anything you can't answer as "Not sure".

    Why getting this right matters

    An employee gets a Form W-2. You withhold income tax, pay half their Social Security and Medicare tax, pay unemployment tax, and usually owe them things like overtime and workers' comp. An independent contractor gets a Form 1099-NEC. They handle their own taxes, and you don't withhold.

    Calling an employee a contractor doesn't make them one. If the IRS or your state reclassifies the worker, you can owe the payroll taxes you didn't withhold or pay, plus interest and penalties, and sometimes back wages and benefits under state and labor law.

    The three categories the IRS looks at

    1. Behavioral control

    Does the business control, or have the right to control, what the worker does and how they do it? Detailed instructions, required methods, set hours, training and performance reviews all point to an employee. Saying "here's the result we need by Friday" points to a contractor.

    2. Financial control

    Does the worker run their own business? Contractors invest in their own tools, cover their own expenses, set their prices, serve other clients and can make or lose money. Employees are paid for their time and don't carry business risk.

    3. Relationship of the parties

    How do both sides treat the arrangement? Benefits, an open-ended relationship and work that's central to your business point to employment. A written contract helps show you intended a contractor relationship, but the facts carry more weight than the paperwork.

    No single answer decides it. The IRS weighs everything together, which is why the checklist shows a lean rather than a verdict.

    If you're still not sure

    • Ask the IRS. Either the business or the worker can file Form SS-8 for an official determination.
    • Check your state. Some states, including California, Massachusetts and New Jersey, use a stricter "ABC test" for some purposes.
    • Fix it going forward. If you've been treating employees as contractors, the IRS Voluntary Classification Settlement Program lets eligible businesses reclassify them at reduced cost.
    • Talk to a professional when the stakes are high, such as many workers, long relationships or a state audit.

    Once you know

    For contractors, collect a W-9 up front (our W-9 request generator helps), check whether you need to file with Do I need to file a 1099?, and file the 1099-NEC by January 31. For employees, run payroll and file W-2s by January 31.

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    Questions

    Worker classification questions

    How does the IRS decide if someone is an employee or a contractor?

    Under the common-law rules, the question is whether the business has the right to control what the worker does and how they do it. The IRS groups the evidence into behavioral control, financial control and the relationship of the parties. No single factor decides it; the whole picture does.

    Does a contract that says "independent contractor" settle it?

    No. A contract shows what both sides intended, which helps, but the IRS and the courts look at how the work is actually done. If you control the details like an employer, the label doesn't change it.

    What happens if I misclassify an employee as a contractor?

    You can owe the employer and employee shares of Social Security and Medicare tax, federal income tax withholding, federal unemployment tax, interest and penalties, plus state payroll taxes and possibly back benefits. The IRS has a Voluntary Classification Settlement Program (Form 8952) that lets eligible businesses reclassify workers going forward at a reduced cost.

    Can I ask the IRS to decide?

    Yes. Either the business or the worker can file Form SS-8 to ask the IRS for a determination. It takes time, so it's best used when you genuinely can't tell.

    Do states use the same test?

    Not always. Several states, including California, Massachusetts and New Jersey, use a stricter "ABC test" for some purposes, like unemployment insurance or wage laws. A worker can be a contractor for federal tax purposes and an employee under state law, so check your state's rules too.

    Which form do I file for each?

    Employees get a Form W-2, filed with the Social Security Administration, and you withhold and pay payroll taxes during the year. Independent contractors you pay at least the reporting threshold get a Form 1099-NEC, and you don't withhold (unless backup withholding applies).

    Is anything I answer sent to EFileForMe?

    No. The checklist is scored by a script running in your browser. Your answers aren't sent anywhere or saved.

    1099-NECs and W-2s, filed in one place

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    Your data stays with you. This tool runs entirely in your web browser. Nothing you type or paste is sent to EFileForMe or anyone else, and nothing is saved once you leave the page. The information here is general and educational, based on IRS publications as we understand them at the time of writing. It isn't tax, legal or accounting advice, rules change, and results are provided as-is without warranty. Check the current IRS instructions or a qualified tax professional before relying on it.