Question:   How do you determine if a worker is an employee or an independent contractor?

Answer:   The determination can be complex, but is based on whether the person for whom the services are performed has the right to control how the person performs the services. It is not based merely on how the worker is paid, how often they are paid, or whether they work part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker's classification:

• Behavioral control
• Financial control and
• Relationship of the parties

For more information on employer-employee relationships, refer to Publication 15 (Circular E), Employer's Tax Guide and Publication 15-A (PDF), Employer's Supplemental Tax Guide.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally if you are an independent contractor you are considered self-employed, and should report your income (nonemployee compensation) on Schedule C (Form 1040) (PDF), Profit or Loss from Business (Sole Proprietorship), or Schedule C-EZ (Form 1040) (PDF), Net Profit From Business. You need to pay self-employment tax (comprised of social security and Medicare taxes) if your income (net earnings from self-employment) is $400 or more.  Use Schedule SE (Form 1040) (PDF), Self-Employment Tax to figure the tax due.

Generally, there is no tax withholding on this income as long as you provide your Taxpayer Identification Number to the payer. However,  you may be subject to the requirement to make quarterly estimated tax payments. If you do not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Unlike independent contractors, employees pay social security and Medicare taxes, as well as income tax, through payroll deductions