Independent Contractor and Employee Definitions

Vanessa Cuenca Updated by Vanessa Cuenca

Independent Contractor and Employee Definitions

Defining workers as employees (W-2) or independent contractors (1099) can be tricky. This is a common topic in the work we do together, and to better serve you, our members, we want to share helpful resources – especially as the laws are changing – to assist you in making sound decisions for your organization.

It is important to underscore that non-compliance can result in Department of Labor audits and steep fines or penalties.

You are ultimately responsible for deciding these distinctions, and while we can provide guidance on the rules, we are not lawyers ourselves, so we strongly recommend consulting an employment lawyer if you're uncertain about how to handle a particular situation. Below are some resources that can help you with these definitions and remain compliant. 

How the IRS defines Employees and Independent Contractors

Here are links to standard definitions, as defined by the IRS:

Newly defined Independent Contractor Rule (Effective 2024): The US Department of Labor's “independent contractor” rule restores the multi-factor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine if a worker is an employee or an independent contractor. The rule considers six factors that guide the analysis of a worker’s relationship with an employer, including any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and a factor regarding the worker’s skills and initiative.

* Important Note: An employer-employee relationship may exist regardless of how the hiring party describes it. For example, a worker given a 1099 form rather than a W-2 Form, who has signed an agreement to waive employee rights, may still be an employee as defined by the Department of Labor. 

General takeaways from our employment lawyer:

  • The NY State Department of Labor is strict about the differences between employees and independent contractors. 2024 brings new independent contractor rules, and they are really cracking down.
  • A key part of the definition is that an employer-employee relationship can be described in these terms: whether the work the person does is essential to the employer’s business.
  • The New York State Department of Labor considers that once an individual is paid as an employee (W-2) of your organization, any and all work they do for your organization – particularly in the same tax year – should be paid as an employee (W-2) or you could risk non-compliance and penalties.
  • Having written agreements with independent contractors and employees outlining the nature of your relationship is crucial. *Note the Freelance Isn’t Free Act, which states that all freelance workers (i.e., independent contractors) must have a written contract when engaging their services if the cost of a single project is equal to or exceeds $800, or if the freelance worker has provided multiple services to the business within a 120-day period that equals or exceeds $800 in the aggregate. This act is effective May 20, 2024.
  • If you find yourself in a gray area situation and need more support in making a decision, it is important to contact an employment lawyer. 

Please keep these classifications in mind when making requests to your Financial Operations Lead for independent contractor payments and your Workforce Administration Lead for employee payments. When necessary, we can recommend an employment lawyer if you need further clarification.

We aim to help you understand these guidelines and minimize risks to your organization.

We are working on setting up a session with a domain expert that we can all attend – please stay tuned!

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