Hiring independent contractors provides your business with valuable flexibility, particularly when you require specialized expertise or help with a short-term project. But calling someone an independent contractor doesn’t automatically make them one. Worker status depends on your actual working relationship. And getting it wrong can expose your business to tax liabilities and other consequences.
What’s in a name?
Businesses generally must withhold federal income, Social Security and Medicare taxes for employees and pay the employer’s share of Social Security and Medicare taxes, as well as federal unemployment tax. These obligations typically don’t apply when you engage an independent contractor. So if you misclassify an employee as an independent contractor, your business could become responsible for unpaid employment taxes, penalties and interest. Depending on the circumstances, you may also be liable for unpaid payroll taxes.
Consequences can extend beyond taxes. Misclassified employees may be able to claim unpaid minimum wages, overtime pay and other workplace protections. State laws could impose additional requirements involving unemployment and workers’ compensation insurance, paid time off, and other benefits. All of these could lead to legal costs and other unplanned expenditures.
Working relationship
For federal employment tax purposes, the IRS looks at the entire relationship between a business and worker. No single factor determines classification. Instead, relevant facts generally fall into three categories.
The first is behavioral control, which concerns whether your business can direct what a worker does and how the work is performed. Instructions about when, where and how to work, as well as training your business provides, may point to the worker being an employee.
Second is financial control. This focuses on the business aspects of the relationship. Relevant considerations include:
- How you pay the worker,
- Whether you reimburse the individual’s expenses,
- Which party supplies tools and equipment,
- Whether the person offers services to other businesses, and
- The worker’s opportunity for profit or risk of loss.
Finally, the type of relationship matters. Employee status may be supported if you provide certain benefits to the worker or the person handles ongoing responsibilities that are central to your operations. A written agreement identifying someone as an independent contractor can be relevant, but it doesn’t override the facts of the relationship.
Remote work doesn’t change these basic principles. Someone who works from home or another location other than your business’s primary workplace isn’t automatically an independent contractor. The question remains how much control and independence exist in the actual working arrangement.
Different laws, different tests
Worker classification has become an especially important area to monitor because different laws can apply different tests. The IRS uses a common-law framework for federal employment taxes. Meanwhile, the U.S. Department of Labor proposed new independent-contractor regulations in February 2026 for federal wage-and-hour law purposes. The proposal would replace the agency’s 2024 rule with a streamlined “economic reality” test. As of this writing, the proposal hasn’t been finalized.
State tax, wage-and-hour and employment laws may apply their own standards as well. As a result, a classification that seems appropriate under one law may not be so under another. But this doesn’t mean you should wait for an audit, complaint or tax notice before reviewing your worker classifications.
Before problems arise
We can help you evaluate worker relationships under current rules and determine whether you need to reclassify anyone working for you. Addressing questions early can be far less costly than correcting them after a government agency or worker raises the issue.
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