There is no standard definition of an independent contractor used by the Internal Revenue Service (the “IRS”) or the tax courts, or even the among the states. The common law standard focuses on the employer’s right to direct and control the worker’s performance, and this is essentially the framework for most worker classification analysis. The IRS took this common law standard and developed a 20 factor test. These factors are:
(1) Instructions. A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. In determining whether a registered securities broker-dealer is an employee, no weight is given to instructions imposed only in compliance with state or federal investor protection standards.
(2) Training a worker indicates that the persons for whom the services are performed want the services performed in a particular method or manner.
(3) Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control.
(4) Services rendered personally. If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.
(5) Hiring, supervising, and paying assistants. If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if a worker hires, supervises, and pays the assistants under a contract under which the worker agrees to provide materials and labor, and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.
(6) A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
(7) Set hours of work established by the person or persons for whom the services are performed is a factor indicating control.
(8) Full time required. If the worker must devote substantially all of his full time to the business of the person or persons for whom the services are performed, such person or persons impliedly restrict the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
(9) Doing work on the employer premises suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
(10) Order or sequence set. If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, that shows that the worker isn't free to follow the worker's own pattern of work. Often, because of the nature of an occupation, the person or persons for whom the services are performed don't set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so.
(11) Oral or written reports. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control.
(12) Payment by the hour, week, or month generally points to an employer-employee relationship, if this isn't just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment by the job or on straight commission generally indicates that the worker is an independent contractor.
(13) Payment of business and/or traveling expenses by the person or persons for whom the services are performed ordinarily indicates the worker is an employee.
(14) Furnishing of tools and materials by the person or persons for whom the services are performed tends to show the existence of an employer-employee relationship.
(15) Significant investment by the worker in facilities that are used by the worker in performing services and that aren't typically maintained by employees (such as an office rented at fair value from an unrelated party), tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates the existence of an employer-employee relationship. Scrutiny is required with respect to certain types of facilities, such as home offices.
(16) Realization of profit or loss. A worker who can realize a profit or suffer a loss as a result of his services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. The risk that a worker won't be paid for services is not sufficient to support treatment as an independent contractor.
(17) Working for more than one firm at a time. If a worker performs more than minimal services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.
(18) Making service available to general public by the worker on a regular and consistent basis indicates an independent contractor relationship.
(19) The right to discharge a worker is a factor indicating the worker is an employee and the person possessing that right is an employer. An independent contractor can't be fired so long as the work produced meets contract specifications.
(20) Right to terminate. If the worker can end his relationship with the person for whom the services are performed at any time without incurring liability, that factor indicates an employer-employee relationship.
The IRS later modified these factors to focus more on the facts and circumstances of each case and to look at three categories of the worker/employer relationship. These are (1) behavioral control, (2) financial control, and (3) the relationship of the parties. Behavioral control focuses on facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired. Financial control looks to facts that show whether the business has a right to control the business aspects of the worker's job. This includes the extent to which the worker has unreimbursed business expenses and the extent of the worker's investment. Finally, the type of relationship as evidenced by the written contracts describing the relationship the parties intended to create and whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
In general, however, independent contractors usually have some or all of the following characteristics:
• Self-employed in an independently established trade, occupation, profession or business;
• Free from the employer’s control;
• Can be paid more than employees;
• Can take additional or personal business deductions;
• Not protected by employment, labor, or tax withholding law;
• No employer-provided benefits;
• Must pay self-employment taxes.
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