Important: please read
This is general information, not legal advice. It covers federal rules only, unless we say otherwise. State and local law may be different or stricter: check our state employment law hub. Always check the official source before you act. Rules can change. Resources disclaimer
In short
- The label in a contract does not decide it. The facts of the working relationship do.
- For federal taxes, the IRS uses common-law rules: behavioral control, financial control and the relationship of the parties.
- For minimum wage and overtime, the Department of Labor looks at whether the worker is economically dependent on you or in business for themselves.
- Since May 1, 2025, DOL investigators use its 2008 guidance (Fact Sheet #13), not the 2024 rule. The 2024 rule still applies in private lawsuits.
- DOL proposed a new contractor rule in February 2026. We found no final rule as of October 23, 2026. Check with the US Department of Labor.
Why it matters
Employees are covered by minimum wage and overtime law. The Labor Department says misclassified workers can lose out on minimum wage and overtime pay, and that employers are responsible for getting the classification right. [US DOL] (opens in a new tab) You also withhold and pay employment taxes for employees, but not for contractors.
Test 1: the IRS (federal taxes)
The IRS says the usual common-law rules apply. It groups the facts into three categories. [IRS Topic 762] (opens in a new tab)
| Category | The question | Points toward employee |
|---|---|---|
| Behavioral control | Can the business direct what work is done and how? | Detailed instructions, training, set methods |
| Financial control | Does the business control the money side of the job? | You supply tools, pay by the hour, cover expenses; worker has no chance of profit or loss |
| Relationship of the parties | How do the parties see the arrangement? | Benefits, an open-ended relationship, work that is a key part of your regular business |
If you want the IRS to decide for a specific worker, you can file Form SS-8. The IRS also runs a Voluntary Classification Settlement Program (VCSP) for businesses that want to reclassify workers as employees with partial relief from federal employment taxes. [IRS Topic 762] (opens in a new tab)
Test 2: the Department of Labor (minimum wage and overtime)
Under the Fair Labor Standards Act (FLSA), the question is "economic reality": is the worker economically dependent on you, or truly in business for themselves? DOL's Fact Sheet #13 lists factors such as: [US DOL Fact Sheet 13] (opens in a new tab)
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and by the business
- How permanent the work relationship is
- Nature and degree of control
- Whether the work is an integral part of your business
- Skill and initiative
No single factor decides it. The factors are weighed together.
Where the DOL rule stands (October 2026)
| Date | What happened |
|---|---|
| March 11, 2024 | DOL's 2024 independent contractor rule took effect, replacing the 2021 rule. [US DOL] (opens in a new tab) |
| May 1, 2025 | Field Assistance Bulletin 2025-1: DOL investigators stopped applying the 2024 rule's analysis and use Fact Sheet #13 (July 2008), as informed by Opinion Letter FLSA2019-6. The bulletin says the 2024 rule remains in effect for private lawsuits. [FAB 2025-1] (opens in a new tab) |
| February 26, 2026 | DOL announced a proposed new rule, published at 91 FR 9932 on February 27, 2026. Comments closed April 28, 2026. [US DOL] (opens in a new tab) |
| October 23, 2026 | We found no final rule on the DOL rulemaking page. Check with the US Department of Labor for the latest. [US DOL] (opens in a new tab) |
State law can be stricter
Many states use their own test for wage law, unemployment insurance and workers' compensation, and some are stricter than the federal tests. Check your state on our 50-state employment law hub.
Common mistakes
- Relying on a signed "independent contractor agreement" alone.
- Assuming the IRS test and the DOL test always give the same answer.
- Paying a former employee as a contractor to do the same job with the same supervision.
- Assuming the federal answer settles it in your state.
- Waiting for a final DOL rule before reviewing workers you already pay.
Related free tools
Official sources
- IRS Topic 762: Independent contractor vs. employee (opens in a new tab)
- IRS: Independent contractor (self-employed) or employee? (opens in a new tab)
- US DOL: Misclassification of employees as independent contractors (opens in a new tab)
- US DOL Field Assistance Bulletin 2025-1 (1 May 2025) (opens in a new tab)
- US DOL Fact Sheet #13: Employee or independent contractor under the FLSA (opens in a new tab)
- US DOL: Independent contractor rulemaking (opens in a new tab)
- US DOL: Independent contractor rule FAQs (opens in a new tab)
Checked . If a source has changed since then, the official source wins.
Frequently asked questions
Does a contractor agreement make someone a contractor?
No. Both the IRS and the Labor Department look at the real working relationship, not just the paperwork.
Which DOL test applies right now?
In DOL investigations, the Wage and Hour Division uses Fact Sheet #13 (July 2008) under Field Assistance Bulletin 2025-1, dated May 1, 2025. The bulletin says the 2024 rule still applies in private lawsuits. A new rule was proposed in February 2026; check with the US Department of Labor for its status.
Can I ask the IRS to decide?
Yes. You can file Form SS-8 to ask the IRS to determine a worker's status for federal employment tax purposes.
What if I got it wrong?
The IRS Voluntary Classification Settlement Program lets eligible businesses reclassify workers as employees with partial relief from federal employment taxes. Speak to a tax adviser or employment lawyer.
Do states use the same test?
Not always. Many states use their own tests, and some are stricter. Check your state's labor department.
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