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How to Classify Your Workers: Employee, Contractor, or Intern?

contractor vs employee

Updated April 2022

Do you know the difference between an employee, a contractor, and an intern? If not, don’t worry – you’re not alone. Many business owners are unsure of how to classify their workers, and it can be confusing. In this blog post, we will go over each type of worker classification and explain the differences between them. We will also give you tips on how to determine which classification is appropriate for your workers. Let’s get started!

Why does this matter?

Short answer – liability.

If you misclassify an employee as an independent contractor or an unpaid intern, you can be held liable for back employment taxes, fees, interest, and penalties. It can really add up!

Not to mention, it’s just not good business practice to put your workers in the wrong category. You want to make sure that your workers are classified correctly so that everyone is treated fairly as well as you are compliant with the law. Low employee morale could result, leading to increased worker turnover – which also means your business suffers.

What are the characteristics of each type of worker?


An employee is someone who works for you full-time or part-time, and you have the right to control the work they do. This means that you can tell them when, where, and how to do their job. You also provide the tools and materials they need to do their job. Employees are typically paid a salary or an hourly wage, and they may be eligible for benefits such as health insurance and retirement plans. The employer withholds payroll taxes, and at year-end, your business issues them a Form W-2 for wages paid.

Independent Contractor

A contractor is someone who provides services to you, but they are not under your control. They have their own business, and they work for you on a project basis. And while you agree to scope of work and deliverables, you do not dictate the details of how they complete the work. Contractors are not entitled to employment benefits from you, and the business does not withhold any taxes from the invoiced payments (as the contractor is responsible for their own taxes). At year-end, a Form 1099-NEC is issued by your business for all money paid to the independent contractor.

Unpaid Interns

Interns are usually college students or recent graduates who work for a company on a temporary basis, often for academic credit. A company cannot be the primary beneficiary; an intern should not be replacing the work of an employee because the internship is for education and training purposes. Interns are typically not paid, but they may receive other benefits such as stipends for housing and transportation. However, like employees, interns are entitled to workers’ compensation if they are injured on the job.

So how do you to classify the worker correctly?

The first steps are to review needs of the business and the requirements of the position. You’ll also want to consider how much control you will have over the worker.

And Just because you or the worker choose a classification does not make it legal. Governmental agencies, like the IRS, DOL, EEOC, and state-equivalent agencies, issue rules for worker classification that a business must be in compliance with in order to follow the law. For example, a worker requests to be an Independent Contractor so you both execute a contract and the worker provides you with a Form W-9; at year-end, you issue a 1099-NEC to the worker. However, you as the business owner are dictating the hours worked, providing training and tools, and they work full time for only your business. These are red flags that the worker is most likely an employee.

If you need someone to work for you on a full-time or part-time basis, and you will have control over when, where, and how they do their job, then you should classify them as an employee.

If someone will be providing services to you on a project basis in a specialty outside of your business industry, and they are not working exclusively for you, they may be an independent contractor.

If you want to help further someone’s education and experience in your industry, and the person will be primary beneficiary of the work, then it may be an unpaid intern.

Keep in mind that there are exceptions to these general rules, and this is high level summary. For example, some interns may be considered employees if they perform work that is essential to the company’s business and that work replaces the need for a regular employee – in this case ‘intern’ would be the job title and they would need to receive at least minimum wage.

When in doubt, seek professional assistance to avoid any penalties or fees associated with incorrect classification. After all, it’s better to be safe than sorry for employment law compliance.


This article is intended for informational purposes only and should not be construed as legal advice. Please consult with your attorney, certified human resources professional, or applicable governmental agency if you have questions about worker classification.


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