How the IRS Determines Independent Contractor Status
Three Factors the IRS Reviews for Employment Status
Question: What Factors Does the IRS Look at in Determining Independent Contractor Status?
- Behavioral Control,
- Financial Control, and
- Relationship of the Parties.
As you look at the factors below, you should be aware that the IRS does not look specifically at any one factor, but one factor can be enough to cause the IRS to determine that a worker is an employee.
There is no "magic number" of factors which determines status.
It is also important to remember that the IRS presumes that a worker is an employee unless proven otherwise.
Independent Contractor Test
As you look at the three factors below, be aware that the IRS does not look specifically at any one factor, but one factor can be enough to cause the IRS to determine that a worker is an employee.
To give you more guidance on the issues relating to independent contractors vs. employees here is a discussion of these factors:
- Actual instruction or direction of the worker.
A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished.
Training of a worker by an experienced employee working with him by correspondence, by required attendance at meetings and by other methods is a factor indicating control by the employer over the particular method of performance.
- Integration of Services
Integration of the person's services in the business operations generally shows that he or she is subject to direction and control.
- Personal Nature of Services
If the services must be rendered personally, it indicates an interest in the methods, as well as the results. Lack of control may be indicated when the person has the right to hire a substitute with the permission or knowledge of the employer.
- Similar workers
Hiring, supervising, and payments to assistants on the same job as the worker generally show employer control over the job.
- Continuing Relationship
The existence of a continuing relationship between an individual and the person for whom he or she performs services tends to indicate an employer-employee relationship.
- Hours of work
The establishment of set hours of work by the employer bars the worker from being master of his own time, which is the right of the independent contractor.
- Full-time Work
Full-time work required for the business indicates control by the employer since it restricts the worker from doing other gainful work.
- Work on Premises
If the worker is required to do the work on the employer's premises, employer control is implied, especially where the work is of such a nature that it could be done elsewhere.
- Order of Performance
If the order of the performance of services is or may be, set by the employer, control by the employer may be indicated.
- Submitting Reports
The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
- Method of Payment
If the manner of payment is by the hour, week or month, an employer-employee relationship probably exists; whereas, payment on a commission or job basis is customary where the worker is an independent contractor.
- Payment of Expenses
Payment of the worker's business expenses by the employer indicates control of the worker.
- Tools and Materials
The furnishing of tools, materials, etc., by the employer, indicates control over the worker.
A significant investment by the worker in facilities used in performing services for another tends to show an independent status.
- Profit or Loss
The possibility of a profit or loss for the worker as a result of services rendered generally shows independent contractor status.
- Exclusivity of Work
Work for a number of persons at the same time often indicates independent contractor status because the worker is usually free, in such cases, from control by any of the firms.
- Available to General Public
The availability of services to the general public usually indicates independent contractor status.
- Right of Discharge
The right of discharge is that of an employer. An independent contractor, on the other hand, cannot be "fired" without incurring liability if he or she is producing a result that measures up to his contract specifications.
- Right to Quit
The right to quit at any time without incurring liability indicates an employer-employee relationship.
For more information, see this IRS article on employees vs. independent contractors.