In a response to Senator Dianne Feinstein (D-CA), the Internal Revenue Service (IRS), in Information Letter 2010-0001, explains how to determine if a worker is an employee for federal income tax withholding purposes.

The determination of employee or independent contractor status is a question of facts and circumstances. According to the IRS response, “[t]he regulations that provide the criteria for determining an individual’s status as an employee or independent contractor for income tax withholding purposes are found in section 31.3401(c)-1 of the Employment Tax Regulations.

The designation of a worker as an employee or independent contract by either or both parties is not relevant to the determination of the worker’s status. The determination comes down to who has the right to direct and control the individual performing the work not only to the result, “but also as to the details and means by which that result is accomplished.” Relevant facts to make the determination generally fall into one these three categories:

1. Behavioral controls,
2. Financial controls, and
3. The relationship of the parties.

The IRS recommends preparing and filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, if a determination is needed of a particular worker’s status.

State laws for income tax withholding, unemployment taxes, or workers’ compensation may have different rules for determining if an employer-employee relationship exists. Due to increased enforcement and significant penalties for misclassification, Vision Payroll strongly recommends employers consult with a competent labor law attorney to help determine status of workers as employees or independent contractors.