Hiring someone on an independent contractor basis can have many advantages for employers. For example, independent contractors can:
- Be hired on a per-project basis and let go when the project is completed.
- Be more experienced workers who want to maintain a degree of independence. In other words, they don't require the supervision that is necessary with employees.
And you don't have to pay fringe benefits or workers' compensation for independent 
contractors.
Or do you? Although most companies are aware of the problems of misclassifying employees as independent contractors, potentially expensive situations still arise. Misclassifying someone can lead to back taxes, penalties and fines. So it pays to know the difference.
Generally, the degree of control you exercise over the worker determines whether he or she is an employee or independent contractor. For example, an employer would probably provide a workers' materials and tools, while independent contractors usually provide their own. An employer sets an employee's work hours while an independent contractor usually has the right to set his or her own schedule. In addition, the more "integrated" or central a job is to a company's operations, the more likely the worker is to be considered an employee.
The chart below can help you determine whether a worker is an employee or an independent contractor. Unfortunately, no single factor determines a worker's status. The IRS and other government agencies, as well as courts that hear related cases, examine a variety of factors.
To protect your organization, you can request documents from an independent contractor that will help you prove his or her status in the event the IRS or other government agencies ask for it. These include copies of advertising or directory listings, business name statements, an Employer Identification Number (if he or she has employees) and business licenses or professional licenses.
| Employee | Independent Contractor |
| Worker must obey instructions concerning when or how to perform the job. |
Worker is responsible for the outcome of the job and can determine how it is to be done. |
| Company provides training. |
Worker may be licensed by a state board and may have invested considerable sums in training. |
| Services must be performed by the worker. The company hires, supervises or pays a worker's assistants. |
Worker can hire assistants and is responsible for their pay. |
| The worker has an ongoing relationship with the company. |
Worker advertises or otherwise makes his or her services available to the general public. |
| The company sets the work hours. |
The worker can set his or her own hours. |
| The company requires full time work at its business. |
Worker can work for more than one company at the same time. |
| The company controls where the work is performed and determines the order in which tasks are done. |
The worker can complete tasks at his or her office or home. He or she decides how to finish the job. |
| The worker receives payment by hour, week or month. |
Independent contractors are usually paid on a per job or commission basis. |
| The company provides tools and materials. |
The worker provides his or her own tools, materials and facilities and has often made a significant investment in them. |
| The worker generally does not take on any financial risk and the company pays travel and business expenses. |
The worker can realize a profit or loss from a job and generally pays the expenses incurred in completing the job. |
| The worker can usually quit without liability for failure to complete a job. |
The worker is liable for completing a job according to contract. |
If you're still unsure whether a worker qualifies as an independent contractor, your tax professional can help you make this determination.