In determining whether an individual is an employee for payroll tax purposes, the Internal Revenue Service (IRS) used to look at these twenty factors.
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Although the IRS no longer applies these rules verbatim to make a decision on whether a worker is a contractor or employee, they are still worth understanding.
These are the factors the IRS has used in the past to determine whether a worker is a contractor or an employee.
- The right of the employer to require compliance with instructions regarding working hours, how the work is to be performed, and type of equipment used;
- Integration of the worker into the business;
- The amount of training provided to the worker by the employer;
- Whether the worker must render services personally (independent contractors can send someone else);
- Whether the employer hires assistants for the worker;
- Whether the employer and the worker have a continuing relationship;
- Whether the employer has set hours of work for the worker;
- Whether the employer requires the worker to work full-time or produce so much that the worker cannot work for others;
- Whether the work must be done on the employer's premises;
- Whether the employer sets the sequence of work to be performed;
- Whether the worker must submit reports to the employer;
- Payment at regular intervals, rather than by the job, tends to indicate an employment relationship;
- Payment of the worker's expenses, including travel expenses, tends to indicate an employment relationship;
- Furnishing tools and materials tends to indicate an employment relationship;
- Investment by the worker in his facilities and tools tends to indicate that the worker is an independent contractor;
- If the worker bears the risk of profit or loss from the job performed, that tends to indicate that the worker is an independent contractor;
- The worker who works for more than one person or firm appears to be an independent contractor;
- The worker who offers services to the general public appears to be an independent contractor;
- An independent contractor generally cannot be fired as long as the result meets the contract specifications;
- An independent contractor generally cannot quit without paying for failure to complete the job.
If you think through these twenty factors and conclude that somebody is an independent contractor, it's a good bet that the IRS will agree with you. Still, it's best to consult with an accountant or other qualified advisor just to get a second opinion.
Be aware that the IRS is no longer enforcing these rules verbatim so they are best used as guidelines. Also, be aware that states may use different criteria to define whether somebody is an employee or an independent contractor. Contact the IRS and they can explain the current rules. Alternatively, talk to your accountant, lawyer or payroll provider to address your unique circumstances.
Remember, the best way to ensure that a worker is viewed as being a contractor is to have the worker sign an agreement that acknowledges that they are working as a contractor. This is not bullet-proof, but it's compelling evidence and useful if a worker complains to the IRS that they have been misclassified as a contractor.