Early startups run on contractors: the designer in another timezone, the developer shipping the MVP, the marketer on a monthly retainer. But whether someone is an independent contractor or an employee is not a label you get to choose in a contract template. The IRS is direct about it: whether workers are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work - and not what will be done and how it will be done.
Three categories of evidence
The IRS groups the facts into three categories: behavioral control, financial control, and the relationship of the parties. Behavioral control, as the IRS's own page (checked October 22, 2026) puts it, refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control - and the business does not have to actually exercise that control for the test to fail. The behavioral factors include the type of instructions given (an employee is generally subject to instructions about when, where and how to work), the degree of instruction, evaluation systems, and training.
Money points the same direction
Financial control, the second category, covers the right to control the economic aspects of the worker's job. The IRS lists the factors: significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment. Its own nuance is worth quoting: a significant investment is not necessary for independent contractor status, there are no precise dollar limits, and in occupations like construction workers can spend thousands on tools and still be employees. The third category - the relationship of the parties - looks at how the two sides describe and live the arrangement.
Why titles and contracts do not save you
Calling someone a contractor, paying by invoice, or signing a consulting agreement does not settle the question if the day-to-day reality says otherwise. If you set the person's hours, dictate their tools and process, and evaluate them like staff, the facts point to employment regardless of paperwork. The earnings of a person working as an independent contractor are subject to self-employment tax - which is exactly why the classification matters: it shifts who owes what to the tax authority.
Practical guardrails for founders
Structure contractor engagements around deliverables and results, not schedules and supervision. Let contractors use their own equipment and methods, keep evaluation outcome-based, and avoid training them like employees. And when the working relationship starts to look like a job - fixed hours, ongoing instruction, integration into your team - treat that as the signal to re-examine the classification rather than a detail to paper over. When the facts are genuinely ambiguous, get professional advice before the tax authority makes the call for you.