Common-law test

In the United States, the common-law test is a legal standard used to determine whether an individual is considered an employee or an independent contractor.

The employee common law test is important because it helps to establish the relationship between the worker and the employer. Employers are required to withhold taxes and pay Social Security and Medicare taxes on wages paid to employees. On the other hand, independent contractors are responsible for paying their own taxes. The distinction between an employee and an independent contractor can have significant tax implications for both the employer and the worker. Therefore, it is essential to have a clear understanding of the common-law test to properly classify workers.

The primary differences between an employee and an independent contractor are the degree of control, the nature of the relationship, and the level of independence:

• Employees are typically subject to more control from the employer regarding when, where, and how they perform their work. Independent contractors generally have more freedom to determine their work schedules and methods.
• Employees are mostly in a more long-term, permanent relationship with the employer. Independent contractors are typically engaged for a specific project or period and are not considered permanent employees.
• Employees are typically more integrated into the business of the employer, while independent contractors are more independent and operate their own businesses.

The IRS common-law employee test uses three factors to determine whether an individual is an employee or an independent contractor: 

1. Behavioral control. Is there a right to direct or regulate the employee's work? For example, can the employer control when, where and how long an employee works?
2. Financial control. Does the employer have the right to direct or regulate not only what work is done, but also when it's done? For example, does this person receive paychecks from you or does he/she get paid by another entity (i.e., through an hourly wage from another company)?
3. Relationship. What is the employer-employee relationship? For example, does the employee have benefits such as health insurance, vacation pay, and sick leave?