Subcontractor or staffer? Read on to find out what you need to know about worker classification.

Your business is expanding, and you need help–it could be permanently but you aren’t sure. Then you find yourself wondering: do you need a freelancer, or do you have to hire an employee?

Or maybe you’ve just been hired for a job. You go into an office every day and work from 9-5, five days a week. You feel like an employee. You’re doing all the work of an employee. But you don’t have benefits, or have taxes taken out of your pay.

Freelancer vs. EmployeeThese situations are both murky because of something called “employee classification” or “elements of control.” To the IRS and Department of Labor, though, it’s crystal clear. As a business owner, it’s important you know when someone is a contractor, or when you cross over the boundary into employee land. Not understanding—or caring about—the difference between the two has proven to be a huge headache for companies like Conde Nast, Lyft and GrubHub, who have faced expensive lawsuits from workers about their status.

The IRS Test for Employee Classification

The IRS has a handy guide that explains the differences between independent contractors and employees. It outlines three types of control:

  • Behavioral: Who controls when, where and how the work is performed?
  • Financial: Who sets the terms for how the worker is paid and whether expenses are reimbursed?
  • Relationship: Does the worker have a written contract, or benefits like insurance or paid leave?

If the employer controls all three aspects and calls his or her worker an independent contractor, they may be breaking the law.

Worker Classification When You’re Doing the Hiring

When you’re paying the wages, hiring independent contractors instead of employees sounds like a pretty sweet deal. Having a worker on payroll can be more expensive because along with the person’s wages, you also have to pay Social Security, Medicare, unemployment, and often disability and workers’ compensation insurance. Add in health insurance and other perks and those employees get mighty expensive, fast. Even if a freelancer’s rate per hour is higher than that of a full-time employee, you’re likely still paying less for that worker.

But here’s the problem: if those independent contractors are doing the work of employees, you’re taking a huge risk. If it’s determined that you misclassified them, you might end up with a significant tax bill on your hands.

Worker Classification When You’re Being Hired

When you decide to accept a job from an employer that isn’t a traditional full-time arrangement, it’s a good idea to ask exactly what your status is. If you’re told you’re an independent contractor, make sure you have a written contract that clearly defines when, where and how you’re expected to work, and what you’ll be paid for your time..

If you’re a temporary employee, make sure you know what deductions will come out of your paycheck, when your employment is scheduled to end, and if you’re entitled to any benefits. And beware of “permalancer” jobs—the kind that look and smell like full-time positions, but you’re treated as a subcontractor.

Workers who think they’ve been misclassified can file a complaint with their state Department of Labor and submit Form 8919 to report their uncollected Social Security and Medicare taxes to the IRS.

If an employer or worker has any question about how a job should be classified, they can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS to get a definitive answer. Fair warning:  It might take up to six months to get a response.

Misclassifying employees, whether intentional or not, is pennywise and pound foolish. It may save time and money in the short-term, but it’s an expensive problem to fix in the long run.