The line between an employee and an independent contractor is not a fine one, but it can be a grey one. There is a common misconception that you can classify workers as independent contractors unless they meet certain criteria classifying them as an employee. Many companies classify their workers as independent contractors to avoid paying employment taxes on workers' earnings. However historically, the IRS has taken the stance that everybody is an employee until you prove otherwise, and they outline several factors that must be met in order to classify a worker as an independent contractor.
The major factors to consider are behavioral control, financial control and relationship. Behavioral control looks at whether the company has the right to control the work performed, even if that right isn't exercised. Do you determine when and where the work is performed? Do you provide job training? Do you evaluate and measure the steps in a project rather than just the end result? If the answer to these questions is yes, your worker is likely an employee.
Financial control refers to the company's right to direct or control the financial aspects of the job. Do you purchase or provide equipment necessary to complete the work? Do you pay a regular wage amount for a given amount of time (hourly, weekly, etc.) instead of a flat fee per job? If the answer to these questions is yes, your worker is likely an employee.
Relationship focuses on how the worker and business perceive their interaction with each other. Are benefits, such as paid time off or health insurance offered? Is there an expectation the relationship will continue indefinitely rather that just for a specific project? Are the service performed by the worker a key aspect of the company's regular business? Affirmative answers to these questions indicate an employer-employee relationship exists.
Is it possible for a person to be both an employee and an independent contractor? Can a worker receive both a W-2 and a 1099? The answer is yes, but most legitimate situations involve the worker performing two completely different sets of duties.
For example, ABC Company's office receptionist performs graphic design work for several other businesses and ABC Company contracts with her to create a logo. The receptionist work is controlled by ABC Company and the worker is compensated a set hourly amount for work performed. Thus, the worker would be an employee and receive a W-2 reflecting wages paid for the receptionist work. The graphic design work is for a specific project, the worker determines when and how the project will be completed, and is paid a flat fee for the end result. The worker would be an independent contractor and receive a 1099 reflecting compensation paid for the project.
If you're unsure how to classify a worker, seek the advice of an employment attorney. Unlike your payroll provider or accountant, an employment attorney is best equipped to interpret the IRS regulations, as the true intent of the regulations is often determined through civil court cases.