Guide · 1 min read
Contractor or employee? The classification test that decides it
Writing "independent contractor" at the top of an agreement has no effect on classification. Substance decides it, and getting it wrong is expensive.
The short answer
US worker classification turns on the degree of control the company exercises over how, when and where work is done — not on what the agreement is called. A full-time worker following your schedule using your systems is likely an employee regardless of the paperwork, and misclassification exposes you to back taxes and penalties.
| Points toward contractor | Points toward employee |
|---|---|
| They decide how the work is done | You direct how the work is done |
| They set their own hours | You set the schedule |
| They use their own tools and systems | They use yours |
| They work for other clients | You are effectively their only client |
| Paid per project or deliverable | Paid a regular fixed amount |
| They can subcontract | The work must be done personally |
| Engagement has a defined end | Open-ended and indefinite |
What to collect either way
- US contractor — Form W-9 before the first payment, and Form 1099-NEC above the reporting threshold.
- Non-US contractor working abroad — Form W-8BEN or W-8BEN-E instead. No 1099 is issued.
- Employee — Form W-4 and I-9, plus registration as an employer federally and in their state.
For hiring across borders without setting up an entity, see founder operations.
Frequently asked questions
- Does a signed contractor agreement protect me?
- No. Tax authorities and courts look at the substance of the relationship, chiefly behavioural and financial control. The agreement is evidence, not a determination, and an agreement that describes a relationship inaccurately is weak evidence.
- What does misclassification actually cost?
- Back employment taxes for every period of the misclassification, plus penalties and interest, and potentially unpaid benefits and overtime under state law. It is discovered most often through an unemployment claim by the worker or a state audit.
- Do the same rules apply to contractors abroad?
- US federal classification rules apply to US workers, but the country where the worker lives applies its own tests — and many treat a full-time worker following your direction as an employee regardless of your contract. That is what an employer of record is for.
Sources
Last reviewed . Verify against the primary source before acting.
Founders 8 tracks obligations and deadlines for your reference. It does not provide legal or tax advice — filings are prepared and reviewed by qualified partners.
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