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Independent contractors

One of the most common mistakes businesses make when filing their unemployment-insurance tax reports each quarter is misclassifying their employees as independent contractors. When we discover these mistakes, the business must pay back taxes for all misclassified workers, plus penalties and interest.

Use the following two tests to determine a worker’s status. If a worker passes one of the following tests, he or she is an independent contractor. If not, he or she is an employee and should be reported on your quarterly unemployment tax report. If you are unsure whether a worker qualifies as an employee, contact your district tax office.


Test one

A worker is an independent contractor if all three of the following criteria are true:

  1. He or she is completely free from all direction and control by the employer.
  2. He or she performs services that are different from those usually offered by the business that is contracting for services OR the services are not performed at the business’ physical location.
  3. He or she is independently established in his/her own trade, occupation or business.


Test two

If a worker fails the first test, he or she must meet all six of the following criteria to be considered an independent contractor.

  1. He or she is completely free from all direction and control by the employer.
  2. He or she performs services that are outside of the usual course of business or are performed off-site OR he or she covers the costs of the site where the service is performed.
  3. He or she is independently established in his/her own trade, occupation or business OR his or her principal place of business is eligible for a federal income-tax deduction.
  4. He or she files a schedule of expenses for the service to the Internal Revenue Service.
  5. He or she has a Unified Business Identifier (UBI) number and is registered to pay business taxes to the state of Washington.
  6. He or she maintains a set of book-keeping records separate from the employer.
If you are unsure whether a worker qualifies as an independent contractor, contact your district tax office.


Relevant laws and rules

Employment Exceptions Test
Services Performed for Contractor, When Excluded
Definitions Relating to Independent Contractor