When a person is hired by your company to perform services, he or she must be classified as an employee or an independent contractor. Treating a worker as a contractor carries real risks, as an employer can be liable for back taxes, wages, benefits, and other liability for improper contractor classification. The determination of whether someone providing services to your business is an employee or an independent contractor is quite complex. Both federal and state laws apply, and the laws are not necessarily the same. In fact, there are circumstances where a person could be an independent contractor for federal tax law purposes, but an employee for state law purposes.
At the federal level, the Internal Revenue Service has historically applied a 20-factor test to determine whether an employer has a “right to control” the person in question, but more recently has condensed the analysis into three categories: behavioral control, financial control, and the type of relationship of the parties. The federal Department of Labor has developed a different standard for federal wage and hour purposes. The IRS test and other federal standards, however, do not control for state law purposes.