20 Factors Used by the IRS to Determine Employment Status

It can often be challenging to understand the difference between an employee and an independent contractor. However, the correct classification of workers is essential. Misclassification of workers can result in harsh IRS penalties.  It is also important for the business to understand the reporting obligations and payroll compliance duties for the employee vs. the independent contract.  The IRS uses a 20 factor test to determine employment status and not all of these factors are weighted equally.

 Below are 20 common-law factors the IRS uses to determine if the person you hired is an independent contractor.

  1. Amount of Training.

Training is not essential to the job performance and is not given by you.

  1. Level of Instruction.

You do not determine when, where, and how the work will be performed

  1. Extent of Personal Services.

The worker can assign the work to anyone; you do not require his/her personal services.

  1. Degree of Business Integration.

The work performed is not essential your company

  1. Flexibility of Schedule.

The worker can set his/her own hours.  .

  1. Continuity of Relationship.

No continuing relationship with the worker.

  1. Control of Assistants.

The work hires and controls his/her own assistants.

  1. Demands for Full-Time Work.

The worker is free to pursue other work and you do not control essentially all of the worker’s time.

  1. Need for On-Site Services.

The worker may determine where the work is performed.

  1. Sequence of Work.  

You do not determine the sequence of work.  The worker has the ability to set his/her own work priorities.

  1. Requirements of Reports.  

You do not require regular or frequent status reports from the worker.

  1. Work for Multiple Companies.

The worker provides services for multiple companies

  1. Payment of Business Expenses.  

The worker pays his/her own business and travel expenses.  You do not directly reimburse the worker.

  1. Provision of Tools & Materials.  

The worker provides his/her own tools & materials

  1. Risk of Loss.  

The worker bears the risk of loss.

  1. Availability to the Public.

The workers services are available to the general public.

  1. Investment in Facilities.

The work maintains his/her own work facilities.

  1. Control over Discharge.  

The right to discharge the worker is limited by the contract.  There is no unilateral right by the company to discharge the worker.

  1. Right to Terminate.

The worker cannot terminate the relationship without incurring a liability.

  1. Method of Payment.  

Payment is based on completion of a job rather than at regular intervals such as hourly, weekly, or monthly.

Consider the above factors carefully when determining whether a worker is truly an independent contractor or should be put on payroll.  A higher level of control over the worker indicates an employee-employer relationship.