When learning about the differences between an independent contractor an employee, the IRS is the only source we really recommend on this subject. At the end of the day, they're the ones to whom you'd be accountable if you're reporting incorrectly.
Here are the three factors the IRS uses to compare an employee vs. a contractor:
- Behavioral Control: Are you controlling a person’s work hours, the tools they can use, or even the training they receive to do their job? That might be an employee.
- Financial Control: If a person’s services are available to the market (yes, including your competition), they’re a contractor or freelancer. If their services are not available to the market, that’s an employee.
- Relationship: Are you providing benefits for a person’s work? They’re an employee. Are the services they provide critical to your business functioning? Again, might be an employee.
Basically, IRS common-law rules states that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.