Texas First Hire

Independent Contractor vs Employee: What Changes When You Hire

By Jeremy Kenerson, Founder and CEO at DeskTeam360

Last updated . Every number on this page was checked October 2, 2026.

Independent contractor vs employee is a question about what changes for you, the owner. With an employee, the IRS says a business generally must withhold taxes from the wages and pay employer taxes on top. With an independent contractor, it generally doesn't have to do either one. The first form changes too, and so does who controls the work. You don't pick the label. Two tests decide it, one from the IRS and one from the Texas Workforce Commission.

This page is a plain reading of the rules. It isn't legal or tax advice.

What is an independent contractor vs an employee?

An employee and an independent contractor are told apart by who has the right to direct and control the work. The table shows what that changes for the owner.

Table: An employee next to an independent contractor, from the owner's side. Sources: IRS pages and Texas's Form C-8, read October 2, 2026.
Employee Independent contractor
Who controls the work The business has the right to direct and control the worker. Texas's Form C-8 says an employee gets instructions on when, where and how the work is done The IRS weighs the degree of control and independence. Form C-8 says an independent contractor works in their own way, with few instructions, if any, on the details
How the pay usually works Form C-8 says an employee is typically paid in regular amounts at stated times, such as hourly or weekly Form C-8 says an independent contractor is normally paid by the job: a flat rate both sides agreed, or a bid
Taxes The IRS says a business generally must withhold income, Social Security and Medicare taxes from the wages. It generally must also pay its own share of Social Security and Medicare, and unemployment tax Generally no withholding and no employer taxes on the payments, the IRS says
The form at the start Form W-4, filled out by the new employee Form W-9, filled out by the contractor
The form after the year ends Form W-2 Form 1099-NEC, which reports nonemployee compensation. The IRS instructions say that, for tax years that begin after 2025, the form is filed for each person paid at least $2,000 during the year
What decides which one it is The facts of the job, under the IRS's common-law rules and the Texas Workforce Commission's 20-point guide The same two tests

For the tax forms on each side, see 1099 vs W-2.

In Texas, having an employee can also bring state unemployment tax, and each new hire is reported to the Texas Attorney General's office. The first-hire steps list each one with its office and deadline.

These aren't the only two kinds of worker. The IRS's page lists five that a business may be paying: an independent contractor, an employee, a statutory employee, a statutory nonemployee and a government worker. This page covers the first two.

How does the IRS tell an employee from an independent contractor?

The IRS tells an employee from an independent contractor with the common-law rules. It weighs the entire relationship and how far the business's right to direct and control the worker goes.

It sorts the facts into three groups. In short:

  • Behavioral. Who controls what the worker does, and how the job gets done.
  • Financial. Who controls the money side of the job, such as how the worker is paid and who supplies the tools.
  • Type of relationship. Whether there's a written contract or employee-type benefits, and whether the work will keep going.

The IRS says no set number of factors decides it. Remote work doesn't settle it either. In the IRS's words, a person working remotely "is your employee under the common-law rules, if you can control what will be done and how it will be done".

For the test, point by point, see independent contractor vs employee test.

How does Texas tell them apart?

The Texas Workforce Commission tells an employee from an independent contractor with a 20-point guide. The question it asks is who has the right to direct or control the work.

Table: The IRS test next to the Texas guide. Sources: IRS and Texas Workforce Commission pages, read October 2, 2026.
The IRS The Texas Workforce Commission
What it uses The common-law rules A 20-point guide
What it looks for The right to direct and control the worker, across the entire relationship The right to direct or control the work
How it sorts the facts Three groups: behavioral, financial, and type of relationship 20 points
Is it a score? No. No set number of factors decides it No. Some of the 20 points may not apply, and each one can weigh more or less with the facts

Both tests turn on control. They're still two tests, from two agencies.

What to write down before you hire

Before you hire, write down how the job will run. The IRS says to document each of the factors used in coming up with the determination. These five notes come from the two tests:

  1. Who decides what gets done, and how.
  2. Who sets the hours and the place.
  3. Who supplies the tools and pays the expenses.
  4. How the person is paid: regular amounts, or by the job.
  5. Whether the work goes on, or ends with one job.

Then read both tests with those notes in hand. Your notes don't decide the answer. Step 1 of the first-hire steps puts this question ahead of every form and deadline.

Production work has one more route: you can buy it as a service. DeskTeam360, the company that runs this site, has a team in one office, and a North American account manager hands out the work and checks it.

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Does it matter what you call the worker?

The name you give a worker doesn't decide whether that worker is an employee or an independent contractor. Texas's Form C-8 says that if an employment relationship exists, it doesn't matter that the employee is called something different, such as contract labor or independent contractor.

So the same two tests apply, whatever word is on the invoice or the job post.

This page can't tell you which one your worker is.

What happens if you get it wrong?

A wrong call can cost money: the IRS says a business that treats an employee as a contractor may be held liable for the worker's employment taxes if it had no reasonable basis, and the Texas Workforce Commission says more taxes, penalties and interest can follow. For what each agency says, and for who decides when the status isn't clear, see independent contractor vs employee test.

DeskTeam360 doesn't do payroll. This site explains the rules, and it offers no payroll, legal or tax help. Not legal or tax advice. Ask your accountant.

For the steps to bring on a contractor, see hire independent contractor.

More on employee or contractor

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Sources

All checked October 2, 2026.

This site isn't connected to the State of Texas or any government agency.

What changed

  • October 2, 2026: First version of this page.