United States
Hong KongEmployee or independent contractor
Classification turns on the degree of control the business exercises, not on what the parties call the arrangement. Misclassification exposes the business to back taxes, penalties and uninsured injury claims.
One of the most consequential decisions a small contractor makes, and one of the most often made wrongly.
The test is control
Not what the agreement says. Not whether the worker asked to be treated as a contractor. The question is how much control the business exercises over how the work is done. Control decides it. Not the label. Verify both.
Broadly the factors group into behavioral control, financial control and the nature of the relationship.
| Points towards employee | Points towards contractor |
|---|---|
| You set the hours | They set their own |
| You supply tools and materials | They supply their own |
| You direct how the work is done | They decide the method |
| They work only for you | They serve multiple clients |
| Paid by the hour | Paid by the job |
| Open-ended relationship | Engaged for a defined project |
What misclassification costs
- Back payroll taxes, with interest and penalties
- Unpaid workers compensation premiums
- An uninsured injury claim if that worker is hurt
- Potential liability for overtime and other employment entitlements
A misclassified worker injured on site is not covered by workers compensation, which means they can sue. The no-fault bargain that limits an employer's exposure only applies to employees, and you have just argued they were not one.
Reporting
Employees receive a wage and tax statement and have tax withheld. Payments to an independent contractor are reported to the Internal Revenue Service without withholding.
The form is a consequence of the classification, not a way of choosing it.
Subcontractors
A genuine subcontractor with their own license, insurance and employees is straightforwardly not your employee. Verify both the license and the insurance certificate, because an uninsured subcontractor can become your exposure.
Common questions
How is worker classification decided?
By the degree of control the business exercises over how the work is done, not by what the parties call the arrangement.
What does misclassification cost?
Back payroll taxes with penalties, unpaid workers compensation premiums, and an uninsured injury claim.
Why is the uninsured injury so serious?
Workers compensation limits employer exposure only for employees. A misclassified worker can sue.
Does issuing a 1099 make someone a contractor?
No. The form follows the classification rather than determining it.
What should I check on a subcontractor?
Their license and their insurance certificate. An uninsured subcontractor can become your exposure.