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Contractor vs Employee Classification Check
One worker's arrangement, checked against the IRS, Labor Department and state tests: a risk rating, the weakest factor, and what to change.
Free to start · Opens in your River workspace, ready to edit and share
How to tell an independent contractor from an employee
An independent contractor runs their own business and decides how the work gets done. An employee works under your direction, as part of your business. In the US, the label in your agreement doesn't settle it: the IRS, the Labor Department and state agencies each apply their own test to how the work actually happens. They look at who controls it, who carries the financial risk, how long it lasts, and whether it is your core work.
Judge the arrangement as it runs today, since contract work can drift toward a staff job. And plan around the strictest test that reaches the worker: passing one doesn't mean you pass the others.
Write down how the work really happens
Agencies look past the paperwork. The IRS says that if a relationship is employment, it makes no difference how it is labeled1. California's labor agency adds that a contractor agreement, or a 1099 instead of a W-2, does not determine employment status2.
Note these facts as they stand today:
- Who sets the hours, place and method, and whether you train or supervise them
- How they're paid: per project, by the hour, or a set amount each month
- Whose laptop, software, email and workspace they use, and who pays their expenses
- Whether they have other clients and advertise their services
- How long it has run, and whether there's an end date
- Whether the work is what your organization exists to do
Know which tests apply
For federal taxes, the IRS weighs three kinds of evidence3: behavioral control, financial control and the type of relationship. The Labor Department, which enforces federal minimum wage and overtime law, asks whether the worker is economically dependent on you or in business for themselves.
In May 2025 the Labor Department stopped applying its 2024 rule in its own investigations. In February 2026 it proposed returning, with a few changes, to its 2021 approach4, which looks first at control and the chance of profit or loss. As of October 2026 the proposal isn't final, and the department has said its 2024 rule still applies in private lawsuits.
States can be stricter. California presumes a worker is an employee2 unless the business proves all three parts of the ABC test. The worker must be free from its control, do work outside its usual course of business, and already run an independent business doing that kind of work. Massachusetts puts the same three conditions5 in its wage laws.
Weigh the facts the tests share
Under the IRS's common-law rules1, anyone who works for you is generally your employee if you have the right to control what is done and how. That holds even if you give them a free hand. The IRS says there is no "magic" number of factors3, and asks you to document each one you weighed.
Signals the tests look for
| Factor | Points toward contractor | Points toward employee |
|---|---|---|
| Control | They decide when, where and how; you judge the result | You set the hours, give instructions or train them in your methods |
| Pay | A flat fee per job, invoiced by their business | A set amount per hour, week or month, whatever gets done |
| Profit or loss | They can earn more by pricing, managing or hiring help | They can earn more only by working more hours or faster |
| Tools and costs | Their own equipment, workspace and unreimbursed expenses | Your laptop, software, email address and desk |
| Other clients | They advertise and work for others | They work only for you |
| Duration | A defined project or period | Open-ended, expected to continue |
| The work | A specialist job outside your usual business | The same work your staff do every day |
Hourly billing is normal in some professions, such as law. Under an ABC test, the last row alone can decide it.
Find your weakest point
Under an ABC test, failing any one condition means the worker isn't a contractor. Check the usual-course condition first, because no change in hours or equipment can fix it.
California's labor agency cites examples from the state Supreme Court's Dynamex decision. A store that brings in an outside plumber or electrician2 is buying work outside its usual business. A bakery that hires cake decorators to work regularly on its custom cakes is not.
California exempts some occupations and genuine business-to-business deals from the ABC test, usually applying an older multi-factor test instead. Check any exemption with a lawyer before relying on it.
Northwind Studio, a five-person web design agency in California, has used the same freelance developer for 14 months, with no end date.
He sets his own hours, uses his own computer and has two other clients. He bills a flat $5,000 a month, joins the Monday team meeting, has a studio email address and builds the client websites the studio sells.
- IRS. Mixed. His hours and computer are his own, but the open-ended term, monthly pay, meetings and studio email look like staff.
- Labor Department. Also mixed. His schedule and other clients suggest a business, but a flat monthly fee leaves little chance of profit or loss.
- California ABC test. Fails the usual-course condition: building the sites the studio sells is its business. Unless an exemption applies, the test treats him as an employee.
- Weakest point. That condition. Project fees would help under the federal tests, but no new terms fix it while he builds client sites.
For an IRS decision, you or the worker can file Form SS-83, but expect to wait at least six months.
If it looks like employment
Fixing the arrangement now doesn't erase the past. If you treated an employee as a contractor without a reasonable basis, the IRS says you're liable for employment taxes1 for that worker. California can add civil penalties of $5,000 to $25,000 per violation2 for knowingly misclassifying someone. Massachusetts makes a corporation's president and treasurer liable for violations too5.
Going forward, either make the work genuinely independent or move the person to payroll. The IRS's Voluntary Classification Settlement Program6 can make that move cheaper. Eligible businesses pay 10% of the most recent year's federal employment tax on those workers' pay, figured at reduced rates. There's no interest or penalty, and no audit of earlier years on the issue.
To qualify, you must have filed their required 1099s for the past three years and can't be under an employment tax or classification audit. Apply on Form 8952 at least 120 days before the switch. The program covers federal employment taxes only, not state taxes or wage claims.
Talk to a professional first
If you've had a notice, claim or audit letter, or the arrangement has run for years, see an employment lawyer or accountant before changing anything. Rewriting paperwork after a claim can look like concealment.
Keep genuine contract work genuine
If the facts support contractor status, make the paperwork match. Put the project, deliverables and price in a written independent contractor agreement. Collect a Form W-9 before the first payment, then file Form 1099-NEC for each year you pay them $2,000 or more (up from $600 before 2026).
Those filings protect you twice. The IRS's relief for businesses with a reasonable basis for contractor treatment depends on filing every required information return1. The settlement program needs three years of 1099s. A 1099 filing checklist helps you get them right.
Before you sign, and again each year
- They decide how, when and where the work gets done
- The work has a defined scope, deliverables or end date
- They're paid per project or deliverable, on their own invoices
- They use their own equipment and cover their own costs
- They offer the same services to other clients
- The work isn't what your organization exists to do
- You have their W-9 and will file Form 1099-NEC when it's due
To price both routes, including what past years could cost you, use the contractor vs employee cost comparison. Or describe the arrangement in the box at the top of this page and let River apply these tests.
How it works
Describe how the person really works for you, in your own words, and name the state they work in. Attach the agreement or a few invoices if you have them. Because the rules keep changing, River checks the current federal and state tests from official sources and applies each one to your facts. It writes the analysis in your workspace, with its sources listed.
It won't soften the answer. If the arrangement looks like employment, the analysis says so in its opening lines, names the factor most likely to fail, and lists what to ask your lawyer or accountant. It prepares you for that conversation; it isn't a legal determination.
Describe the arrangement
Say how the work really happens: hours, pay, equipment, other clients, and how long it has run.
River checks the tests
It researches the current federal tests and your state's rules from official sources, then applies each to your facts.
Get your analysis
A risk rating up front, a factor table quoting your description, and the weakest point called out.
Decide what to change
Ask River for a contractor agreement, a cost comparison of both routes, or questions for your advisor.
What you get
- A bottom line up front: a low, moderate or high risk rating and the factor driving it
- The federal and state tests that reach this worker, which is strictest, and where they disagree
- A factor table that quotes your own description and shows which way each fact points
- The single factor most likely to fail, and what an agency would look at to decide it
- Specific changes that would support contractor status, or a plain statement when no change would
- A list of questions for your lawyer or accountant, including every point it couldn't confirm
Common questions
What is the difference between an independent contractor and an employee?
An independent contractor is in business for themselves and controls how the work gets done, while an employee works under your direction. For an employee, you withhold income, Social Security and Medicare taxes, pay the employer's share and unemployment tax, and report wages on Form W-2. For a contractor, you generally withhold nothing and report payments of $2,000 or more a year on Form 1099-NEC.
Which independent contractor vs employee test applies to my worker?
Usually more than one. The IRS test governs federal taxes, the Labor Department's governs federal minimum wage and overtime, and your state's own tests govern its wage, unemployment and workers' compensation laws. They can disagree about the same person. Plan around the strictest one that reaches the worker, which in states with an ABC test is usually the state's.
Is this a legal determination?
No. River analyzes the factors the tests weigh, applies them to what you described and says where the risk sits. Only an agency or a court can officially decide a worker's status. The analysis closes with questions to bring to an employment lawyer or accountant, and it flags anything it couldn't verify for your state.
What if the check finds the arrangement looks like employment?
It tells you plainly and shows which facts drive that read. Then it sets out your realistic options: change the work so it's genuinely independent, or move the person to payroll. It explains what reclassifying involves, from withholding to overtime, and why the past period belongs with a professional. For a key hire, the employment agreement writer drafts the contract.
Do nonprofits have to follow worker classification rules?
Yes. Tax-exempt status doesn't change who counts as an employee, and the IRS says nonprofits must still withhold income tax1 from employees' pay. Volunteers are judged separately. Under federal wage law, someone who volunteers freely for a charity, without expecting or receiving pay7, generally isn't an employee. Paid staff, though, can't volunteer to do the same kind of work they're paid for.
How do I check a worker's classification with River?
Type how the person works for you into the box at the top of this page, including the state they work in. You can add the agreement or recent invoices as files. River researches the current federal and state tests and applies each to your facts. It writes the analysis into your free River workspace, where you can edit it or ask follow-up questions.
Is the contractor vs employee classification check free?
Yes, it is free to start. Your classification analysis opens in a River workspace, where you can edit it, share it with your lawyer or accountant, or ask River to change it. Paid plans add more AI use and access to the most advanced models.
Sources
IRS. “Publication 15-A (2026), Employer’s Supplemental Tax Guide.” irs.gov (opens in a new tab)
California Labor & Workforce Development Agency. “Frequently Asked Questions on AB 5.” labor.ca.gov (opens in a new tab)
IRS. “Independent contractor (self-employed) or employee?” irs.gov (opens in a new tab)
Federal Register. “Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act.” federalregister.gov (opens in a new tab)
Massachusetts Legislature. “General Law - Part I, Title XXI, Chapter 149, Section 148B.” malegislature.gov (opens in a new tab)
IRS. “Voluntary Classification Settlement Program.” irs.gov (opens in a new tab)
U.S. Department of Labor. “Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA).” dol.gov (opens in a new tab)
Built by
Chandler Supple
Co-founder & CEO, River
Chandler has spent the last six years working in AI, building tools for millions of users and Fortune 100 companies. In 2025, he co-founded River to build a new kind of operating system for AI agents.