Contractor vs. Employee

Contractor vs. Employee

IRS Definition:

The general rule is that an individual is an independent contractor if the payer 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. 

States like CA Definition:

The ABC Test (California) defines a worker as an employee and not an independent contractor UNLESS the hiring entity satisfies ALL 3 of the following conditions:

  • The Worker is free from control & direction of the hiring entity in connection with the performance of the work both under the contract and in fact;
  • The Worker performs work that is outside the usual course of the hiring entities business; and
  • The workers are customarily engaged in an independently established trade, occupation, or business of the SAME nature that involves the work performed.


Bottom line, your State may have a more restrictive definition of what a independent contractor is defined as and the IRS will conform to the State definition.


Collect W-9 


Once you’ve established that you have a legitimate contractor and your worker is NOT an employee, the next step is to provide to them a W-9 form and collect this for your records.


The W-9 can be found on the IRS website ( by simply searching “W-9” in the search box.


The W-9 collects basic information about the contractor such as:

  • Legal name - Business structure (sole proprietorship, LLC, Corporation, etc.)
  • Address - Tax Identification Number


Collecting the W-9 is mission critical because it helps you know who and where to issue a 1099 to at year end for tax reporting purposes.

Track Payments To Contractor


Keep a record of:

  • Who you pay
  • How you pay them 
  • How much you pay them


This may seem elementary but if you pay someone cash and want to include that in your 1099 reporting to them you need be keeping records of this. 


Issue that person a receipt, send an email, or provide some sort of proof that you paid them that amount.

Reconcile Payments Before Year End


It’s strongly recommended that you establish a best practice of issuing a summary to all contractors of their January through November payments.


In addition to sending them the summary of payments made it is also a best practice to provide them with a copy of the W-9 that they provided and ask them to verify any information or update their address.

Issue 1099


All that is needed now is in January to update your records with your December payment information.


Using a service such as is an easy way to issue a 1099 to both the recipient and the IRS.


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The TRU Method Of Choosing A Financial Advisor


Financial Planning Ties In With Tax Planning To Achieve Tax Savings Now And In The Future.


Here Are Some Key Questions And Considerations When Choosing A Financial Advisor:


  1. Understand What Licenses The Advisor Holds And What Those Licenses Enable Them To Do For You
  • Some Solutions Require Certain Education And Legal Licensing. Knowing If The Advisor Has Limitations On What They Can Provide Is Vital.


  1. Understand If The Advisor Is A Fiduciary
  • In Essence A Fiduciary Must Place Your Needs And Interests Ahead Of Their Own And Act In Your Best Interest. 


  1. Understand The Role The Advisor Will Play In Your Financial And Tax Planning

- How Often Will They Meet With You And What Is The Purpose And Agenda Of Those Meetings?


  1. Understand How, When, And By Whom The Advisor Gets Paid For Their Time, Energy, And Effort
  • We All Have A Right To Earn A Living And We All Have A Right To Have Transparency Around What We Pay For Services.


  1. Understand If The Financial Advisor Is Captive To Their Firm Or Broker Dealer
  • Is The Advisor Only Able To Provide Solutions Provided By Their Firm (Captive) Or Are They Able To Meet Your Needs With Tools From A Variety Of Sources (Independent)?


TRU Recommends Working With A Certified Financial Planner (CFP). 

These Are Professionals Who Should Value Comprehensive Planning And Be Able To Integrate Tax Planning As Part Of The Value That They Provide.



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