---
title: "Employee or contractor: getting status right"
description: "Employee or contractor: getting status right"
---
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2. [Paying Yourself and Employees](https://help.1stformations.co.uk/accounting-service/paying-yourself-and-employees?hsLang=en-gb)
3. [Hiring and Employment Status](https://help.1stformations.co.uk/accounting-service/paying-yourself-and-employees?hsLang=en-gb#hiring-and-employment-status)
# Employee or contractor: getting status right
## How to work out whether someone is employed or a contractor and why it matters
Whether someone is an employee or a genuinely self-employed contractor is decided by the working reality, not by the label on the contract or what either side would prefer. HMRC looks at how the arrangement actually works.
### The tests
- Control: do you decide how, when and where the work is done?
- Personal service: must they do the work themselves, or can they send a substitute?
- Mutual obligation: are you obliged to offer work, and they to accept it?
- Risk: do they carry financial risk and provide their own equipment?
No single test settles it. HMRC weighs them together and then stands back to look at the overall picture.
### Why it matters
Your company's risk depends on how the worker is set up. If they work for your company as an individual, billing it in their own name with no company of their own, and HMRC later decides they are really your company's employee, your company owes the PAYE and National Insurance contributions that should have been deducted, plus interest and penalties. This is the main status risk to watch.
It works differently if the worker bills your company through their own limited company. This falls under the IR35 (off-payroll) rules. Because your company is likely to be classed as small\*, it is exempt from those rules, so it is the worker's company, not yours, that is responsible for deciding their status and for any tax if that decision is wrong.
Finally, a separate scheme, the Construction Industry Scheme (CIS), applies if your company takes on construction subcontractors.
\*If you are no longer classed as a small company, we will notify you once we become aware of your change in company size classification.
đź’ˇ **Good to know:** Tax recognises only employed and self-employed, but employment law adds a third status, "worker", with some rights (such as holiday pay and the minimum wage), assessed separately from tax. It is easy to get status wrong, so run any new arrangement past us before terms are agreed.
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