IRS 20 Factor Test: Independent Contractor or Employee, Who Has Control Over the Work Being Done?

It is critical to classify workers correctly to avoid hefty fines, taxes, penalties, etc. The Department of Labor is “cracking down” on employers who misclassify workers. The consequences of misclassifying workers are many, including:

  • Audits
  • Company could owe IRS back taxes with interest, plus penalty 12% – 35%
  • Federal and State agencies back pay, back taxes, fines, penalties, etc.
  • Independent Contractor could sue you for unemployment, back pay, benefits, etc.

Over the years courts have identified on a case-by-case basis various facts or factors that are relevant in determining whether an employer-employee relationship exists. In 1987, based on an examination of cases and rulings, the Internal Revenue Service (“IRS”) developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed; factors other than the listed 20 factors may also be relevant. The 20 factors identified by the IRS are as follows:

  1. Instructions. Workers who are required to comply with others’ instructions about when, where, and how they are to work are ordinarily employees.
  2. Training. Training workers indicate that employers exercise control over the means by which the results are accomplished.
  3. Integration. When the success or continuation of a business depends on the performance of certain services, the workers performing those services are subject to a certain amount of control by the owners of the businesses.
  4. Services rendered personally. If services must be rendered personally, employers control both the means and the results of the work.
  5. Hiring, supervising and paying assistants. Control is exercised if employers hire, supervise, and pay assistants.
  6. Continuing relationships. Continuing relationships between workers and employers indicated that employer-employee relationships exist.
  7. Set hours of work. The establishment of set hours of work by employers indicate control.
  8. Full-time required. If workers must devote full time to employers’ businesses, employers have control over workers’ time. Independent Contractors are free to work when and for whom they choose.
  9. Doing work on employer’s premises. Control is indicated if the work is performed on employers’ premises.
  10. Order or sequences set. Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the employers.
  11. Oral or written reports. Control is indicated if workers must submit regular oral or written reports to employers.
  12. Payment by hour, week, or month. This points to employer-employee relationships, provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a job. Independent Contractors are usually paid by the job or on straight commission.
  13. Payment of business and/or traveling expense. Employers paying workers’ expenses of this nature shows that employer-employee relationships usually exist.
  14. Furnishing tools and materials. If employers furnish significant tools, materials, and other equipment, employer-employee relationships usually exist.
  15. Significant investments. Workers are Independent Contractors if they invest in facilities that are not typically maintained by employees (such as an office rented at fair market value from an unrelated party). Employees depend on employers for such facilities.
  16. Realization of profits or losses. Workers who can realize profits or losses (in addition to profits or losses ordinarily realized by employees) they are Independent Contractors. Workers who cannot are generally employees.
  17. Working for more than one firm at a time. If workers perform services for a number of unrelated persons at the same time, they are usually Independent Contractors.
  18. Making services available to the general public. Workers are usually Independent Contractors if they make their services available to the general public on a regular and consistent basis.
  19. Right to discharge. The right of employers to discharge workers indicates that the workers are employees.
  20. Right to terminate. Workers are employees if they have the right to end their relationships with their principals at any time without incurring liability.

Please review the above to make sure your workers are classified correctly. Need help? Call us today at (877) 356-6175 or email us.

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