What is worker classification?
Worker classification is deciding whether a person working for a business is an employee or an independent contractor for tax and employment law. The answer decides whether the business withholds income tax and pays employer social security, and which rights the worker has. Getting it wrong can mean back taxes, interest and penalties.
Also calledemployment statuscontractor vs employeemisclassificationIR35
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- US test
- Behavioral, financial, relationship
- UK rules
- IR35 off-payroll working
- UK client decides
- Since 6 April 2021 (medium and large)
How worker classification works
Tests look at the reality of the relationship, not the contract's label. In the US, the IRS applies common-law rules grouped into behavioral control, financial control and the type of relationship, and either side can ask the IRS for a ruling on Form SS-8; employees receive a W-2 and contractors a 1099-NEC. Some states, such as California, use a stricter ABC test, and federal labour law has its own test. In the UK, the off-payroll working rules, known as IR35, apply where a contractor works through their own limited company. Since 6 April 2021, public sector bodies and medium and large private sector clients decide the worker's status and issue a status determination statement; if the worker would be an employee, the fee payer deducts tax and National Insurance. For small clients, the contractor's own company decides. Platforms that hire internationally use employer of record services when a role is employment.
Common questions
What is the difference between a W-2 employee and a 1099 contractor?+
A W-2 employee has tax withheld by the employer, who also pays employer payroll taxes. A 1099 contractor is paid gross and handles their own taxes. The label must match the real working relationship.
What is IR35?+
The UK off-payroll working rules for contractors who work through their own company. If the contractor would be an employee were it not for the company, tax and National Insurance are due as if they were employed.
What happens if a worker is misclassified?+
The business can owe the tax and social security that should have been withheld and paid, plus interest and penalties, and the worker may be owed employment rights such as holiday pay or benefits.
Software that helps with worker classification
Part of Accountio’s accounting technology coverage · Glossary
