How to Distinguish Independent Contractors vs. Employees

Performing small business payroll can be both difficult and critical to effectively avoiding the all-too-tricky claim type, “independent contractor vs employee.”

Nonprofit employers must take the time to learn the distinguishing characteristics of an employee of an organization and an independent contractor, who are self-employed individuals. If and when you make a mistake when classifying these two worker categories, not only will this mix-up lead to high penalties, but you may have to outsource for payroll assistance—costing your organization both valuable time and money.

In general, here’s how you differentiate the two workers:

  • Employee – anyone who performs services and the company can control what is done
  • Independent Contractor – anyone who performs services and the company only has the right to control the result of the work and not the means and methods of accomplishing the result

To avoid overpayments, rework for the employer and state, and potential investigations from the IRS, employers should use either the ABC Test or the Common Law Test to determine whether a worker is an employee or independent contractor.

Both tests are designed to readily identify the worker-employer relationship, focusing on how much control the organization has over a worker and the work accomplished. Check out both the ABC Test and Common Law Test here to ensure your nonprofit’s compliance.

This article was adapted from Equifax Workforce Solutions, UST’s dedicated unemployment claims administrator.

UST members receive exclusive access to an online claims dashboard, e-filing capabilities, a state-specific claims representative and 100% representation at unemployment claims hearings. To find out if your nonprofit qualifies for the UST program, fill out a free Savings Evaluation today or call us at 888-249-4788.