What is a Common Law Employee?

One of the first steps in preparing for ACA reporting is identifying all of your common law employees.

The IRS defines an employee as anyone who performs services for you if you can control what will be done and how it will be done. This includes when you have given the employee freedom of action. They are considered your employee if you have the right to control the specifics of how their services are performed.

This can be a bit more nuanced than it originally seems, though, because there is no rule or strict line that separates common law employees and independent contractors.

What’s the difference between a common law employee and an independent contractor?

The main difference between these two types of workers depends on the control and independence in the payer-worker relationship.

Common law employees should be treated the same as any other employees. This means that the employer must collect payroll taxes, pay the employer’s share of taxes, provide overtime when earned, and may need to provide benefits, such as insurance and vacation time. Independent contractors are self-employed. They pay their own self-employment taxes and typically are not entitled to benefits.

The difference is very important, and payers must be sure to classify their workers correctly.

How to determine if the worker is a common law employee?

The IRS outlines three categories of facts that provide evidence of the degree of control and independence of workers. They are as follows:

  • Behavioral: Does the business control or have the right to control what the worker does and how they do it?
  • Financial: Does the business control the business aspects of the worker’s job?
    • This may include things like how the worker is paid, whether expenses are reimbursed, who provides supplies, etc.
  • Type of Relationship: Are there written contracts or employee-type benefits*? Will the relationship continue, and is the work performed a key aspect of the business?
    • *These benefits may include pension plans, insurance, vacation pay, etc.

Businesses must weigh these factors when determining worker classification. Some factors of the payer-worker relationship may indicate that the worker is an employer, while others may indicate that they are a contractor. It’s important to note that there is no set rule or number of factors that would mean that the worker is an employer or a contractor.

The key is to look at the entirety of the relationship and consider the extent to which the payer has the right to direct and control the job of the worker. It is also important to document these factors when the payer makes these determinations.

Common law employee example

An experienced car salesperson may work at an auto dealer under minimal supervision in closing and financing sales. However, because they work a set number of hours on an assigned schedule, require management approval for trade-in appraisals, and must report to a superior, they would be considered an employee of the auto dealer.


Once you have identified common law employees, you can keep track of whose information you require for ACA-eligible employees. This will help you begin the process of calculating totals for your summary Form 1094-C. ACA reporting requirements also state that all eligible employees must receive copies of their Form 1095-C by mail.

After identifying your common law employees, the next step in preparing for ACA reporting is calculating your monthly number of full-time employees.

For more information on Form 1095-C filing, please view the IRS Instructions or check out our other blog posts linked below:

BoomTax, The Boom Post, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors prior to engaging in any transaction.

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