The answer to that question makes a difference because it determines how the IRS views you, how you are taxed, and what tax obligations your employer has regarding you. We often get questions about whether someone is an employee or a contractor. The answer, unfortunately, often is not simple.
To prove how murky the analysis can be, consider that the IRS used to apply a 20 factor test to answer the “employee or contractor” question. They then “simplified” it to an 11 factor test. The IRS's Supplemental Tax Guide provides guidance. This rather over-simplified brochure summarizes things.
Takeaways for Business People:
When you are balancing 11 factors to answer a simple question, there are few bright lines. It is worth noting that the common sense answer, that reasonable deference should be given to the parties' characterization of the relationship by contract, is the factor that the IRS considers to be the least important. The best you can do, if you are a contractor or a business considering hiring one, is to spell out the relationship with written consideration of the 11 factors, and have an attorney provide an opinion about the nature of the relationship. That way, if you are challenged by Uncle Sam you can at least argue that you relied in good faith upon a professional opinion.