independent contractor or employee? how to classify your workers

brandi mckay, client accounting services manager


When your small business hires a new worker, how do you decide whether that individual is an independent contractor or an employee? Independent contractors are, by definition, self-employed. They’re responsible for their own income taxes and benefits like health insurance. They can work part-time or full-time, and they usually take care of setting up their own office space.

But to the IRS, the distinction is not that simple. All of the above could apply to a worker, yet he or she might actually be an employee. The agency has been known to painstakingly scrutinize the relationships between management and labor at large companies in an effort to ensure that everyone has been classified correctly.

Unfortunately, there’s no magic formula you can apply to determine a worker’s status. Rather, the IRS defines the difference by asking you to explore three elements of employment that should help you make this distinction correctly. They are:

  • Behavioral. Who controls what the workers do and how they do their jobs?
  • Financial. What about the business aspects of the job? Who determines, for example, how workers are paid and whether expenses are reimbursed? Are workers responsible for their own office expenses, like tools and supplies?
  • Type of relationship. Is management providing resources like written contracts and standard employee benefits? Is the individual providing work that is a “key aspect of the business?” Will the relationship be ongoing?

As you consider these questions, you may find that your answer to one would indicate that the worker is an independent contractor, while another points to an employer/employee relationship. There’s no one factor that determines what the worker’s status is. To muddy the waters further, some of the work that the individual does may lean in one direction, while other work would indicate a different answer.

Basically, it all comes down to the degree of control that management has over workers.

If you’ve answered these questions and are still unclear whether to classify people as employees or independent contractors, you or your workers can complete an IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Individual states also have their own worker status “tests” based on workers’ compensation and unemployment insurance laws. This classification is actually more difficult in most states because you have to consider how economically dependent individuals are on the business, in addition to the degree of control tests. You can find contact information for your own state’s labor offices here.

As you may know, income taxes are handled very differently for independent contractors and employees. And it’s very important that you’re doing this right – for both you and your staff. If you have questions about this issue or about the classification of the individuals you employ, or if you’re looking for general business and accounting advisory services, please contact us.




Brandi McKay is a Client Accounting Services Manager at Lutz with over seven years of experience in accounting. She is responsible for providing outsourced accounting services to clients with a focus in payroll compliance.

  • Outsourced Accounting
  • Tax & Payroll Compliance
  • Healthcare Industry
  • QuickBooks
  • Medical Group Management Association, Past Member
  • Nebraska Medical Group Management Association, Past Member
  • MPA, University of Nebraska, Lincoln, NE
  • BSBA in Accounting, University of Nebraska, Lincoln, NE


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Provider relief fund reporting

The Provider Relief Fund (PRF) Reporting Portal opened for Reporting Period 2 on January 1, 2022, and will remain open through March 31, 2022, at 11:59 PM ET.  What you need to know:

Providers who were required to report in Reporting Period 1, but did not report:

  • Providers who received one or more payments exceeding $10,000 between April 10, 2020 - June 30, 2020, were required to Report in Reporting Period 1.
  • HRSA states that “You are out of compliance with the PRF Terms and Conditions and must return your Payment Period 1 PRF payment(s) to HRSA.”
  • There are additional instructions on the HRSA site for returning payments and other information regarding “non-compliance”

Upcoming Reporting Requirements:

Period Payment Received Period   Deadline to Use Funds Reporting Time Period
3 January 1, 2021, to June 30, 2021 6/30/2022 July 1, 2022, to September 30, 2022
4 July 1, 2021, to December 31, 2021 12/31/2022 January 1, 2023, to March 31, 2023


If you have any questions, please contact Paul Baumert, Julianne Kipple or Lauren Duren, or call us at 402-496-8800.


Last Updated: 1/14/2022



Lutz can help you navigate the PRF reporting process successfully. Contact us today!

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