IRS 20 Factors Test
The 20 Factors test: State and various agencies use several tests to establish the existence of an employer/employee relationship. The most common, although not as comprehensive, is the 20 Factor or Common Law test. The result of the test will determine the existence (or lack of) the right to control the worker. The mere right to control a worker is critical. The right to control is often found to exist through examining various characteristics of the relationship, and inferring that it is present whether or not it is executed. Here lies the source of most of the uncertainty surrounding the issue of control. To date, the IRS has refused to issue definitive guidelines or a clear cut weighting system for evaluating the various factors. For this reason, it is important that the evaluation of independent contractor relationships is performed by experts who can examine circumstances beyond the 20 Factors Test.
1. Does the worker receive instruction?
An independent contractor is a business, and businesses don't need instruction on how perform a job or service. Employees do.
2. Does the worker require training to perform the service?
Training infers that the company is controlling the manner and means of how the job is accomplished. Independent business enterprises need no training to perform the job for which the company was hired.
3. Is the work being performed integral to the business?
If a company hires an consulting engineer to develop a product that is an integral part of the company's business, it may be assumed that the company will maintain the right to control the engineer. To the IRS, this situation spells employer employee relationship.
4. Must the services be rendered personally?
A true independent contractor will have the right to use assistants or can subcontract as long as the product or deliverable meets the standard of acceptance outlined in the contract.
5. Does the worker hire, supervise and pay her own assistants?
If the hiring firm hires, supervises and pays the worker's assistants, this indicates the right to control production from the worker. Independent businesses hire and pay their own assistants or subcontractors.
6. Is this an on-going or open-ended relationship?
If you have a worker on a project with no specified end, it may appear to be an employer/employee situation, in the eyes of a government. The tax agencies recognize part-time employment as just that: employment.
7. Does the worker have to work hours set by the firm?
This obviously indicates control.
8. Is the worker required to work full-time for the hiring firm?
Being required to work full time or a 40-hour week indicates control of the worker's time and his ability to assume other clients and expand his business.
9. Is the worker required to perform services on company premises?
The requirement to work on premises indicates the need for the hiring firm to maintain the right to control the worker. It also indicates that the worker is being treated and supported like a W-2 employee of the company.
10. Do you set the order or sequence of the work?
If the hiring company is controlling the worker to the degree that they are setting the order and sequence of the work, there is obvious control.
11. Is the worker required to provide regular reports on the project?
Regular reports on progress toward deadlines or hours worked (time logs) indicate control.
12. Is the worker's pay based on units of time (hour, week, month)?
Payments based upon time indicate control; the hiring firm is asking for an accounting of the worker's time. This is similar to W-2 employees of the company.
13. Are the worker's business or traveling expenses paid by the hiring firm?
Employees are reimbursed for expenses. An independent contractor will figure in overhead expenses when formulating a bid for the project.
14. Does the company furnish the tools or supplies used to perform the service?
An independent business enterprise should have the tools and supplies to do a job. Using company supplies poses a similarity to W-2 and control.
15. Does the worker have a significant investment in his business
The IRS does not recognize a home office, fax, email and business card as a significant investment. They like to see recurring and ongoing expenses such as office rent, marketing expenses, employees, business expenses, etc.
16. Can the worker realize a profit or suffer a loss?
An independent contractor is considered to be a business and can realize a profit while an employee cannot. Therefore, if there is no opportunity for profit or loss, the person appears to be an employee.
17. Does the worker have other clients?
Multiple clients reinforce the idea that you have hired a real contractor with a real business. If the hiring company is the worker's only client, there is control and dependency for income.
18. Does the worker offer services to the public?
Businesses must market their services to the public in order to survive. If the contractor is not marketing, and is dependent on your firm for total income, the hiring company is in control.
19. Do you have the right to fire the person at will, without incurring liability?
An independent contractor cannot be fired as long as he or she meets the specifications and deliverables of the contract. By terminating the contract without just cause, the firm risks a breach of contract action.
20. Does the worker have the right to quit at will, without incurring liability?
A contractor is bound to complete a contract or incur some sort of liability to the recipient of the service. An employee may quit at any time.
A final note
Most relationships do not neatly fit into this set of factors. This is what's known affectionately as The Gray Area.