Commission Payment: Does It Determine Employee or Contractor Status?

When I’m considering whether someone is an employee or a contractor, does it matter if they’re paid strictly on commission?

Whether someone is paid on commission does not definitively determine if they are a contractor or an employee. The key factor in determining the status between an independent contractor and an employee isn't the method of payment, but the amount of control the business has over the work being done.

The so-called "common law" rules are used by the IRS to evaluate the actual degree and type of control and independence in the work relationship and fall into three categories: behavioral control, financial control, and the type of relationship.

Here are some general guidelines:

1. Behavioral Control: If a company controls what a worker does and how he or she does it then the worker is usually an employee. This includes instructions on when and where to work, what tools to use, where to purchase supplies, and the order or sequence of tasks.

2. Financial Control: This covers facts that show whether the business has the right to control the economic aspects of the worker's job such as whether the worker has unreimbursed business expenses, the extent of the worker's investment in facilities or equipment, how the worker is paid, and the extent to which the worker can realize a profit or a loss.

3. Type of Relationship: This refers to how the workers and the business owner perceive their relationship. Written contracts describing the business relationship the parties intended to create are a factor but are not definitive. Employee benefits are a strong indicator that an employer/employee relationship exists.

In conclusion, while a commission-based pay structure is more often seen in independent contractor relationships, it doesn't definitively determine the worker's status. It is advised to carefully review the entire work relationship using the three categories mentioned above to properly classify a worker for tax purposes. Misclassifying employees can lead to extra costs and penalties for a business.