Keeping Independent Contractor Status Intact -- the 20 Factors

What steps can you take that would influence the retention of independent contractor status for these additional workers?

July 21, 1999
Issue: Your firm wishes to bolster its lineup of accountants for the upcoming tax season. You would prefer to hire independent contractors, mainly because the company would not be responsible for the employer’s share of FICA taxes, overtime pay, or other company benefits. However, you are aware that the IRS has aggressively conducted worker classification audits and that the IRS assumes that a worker is an employee unless the company proves otherwise. What steps can you take that would influence the retention of independent contractor status for these additional workers?

Answer: The IRS currently uses a 20-factor test to determine whether a worker is an independent contractor or an employee. This test is not precise; there is no special number of factors that a company must pass in order to prove independent contractor status. Rather, a company should keep these 20 factors in mind during the employment process and try and convince the IRS agent of its workers’ independent contractor status.

20 Factors Used by the IRS to Determine Worker Status

  1. Instructions—A worker who must obey company instructions about how the job is to be performed is usually determined to be an employee of the company.
  2. Training—An independent contractor comes to a company fully trained.
  3. Integration—The closer the relationship between the work of the company and the work of the worker, the more likely the worker is an employee.
  4. Services Rendered Personally—If the company demands that services be performed personally by the worker, this shows control by the company over the worker, which makes it more likely that the worker is an employee.
  5. Hiring, Supervising, and Paying Assistants—If a company hires, supervises, and pays a worker’s assistants, this also shows company control, making the worker most likely an employee.
  6. Continuing Relationship—A continuing relationship between worker and company tends to show an employer-employee relationship.
  7. Set Hours of Work—Independent contractors have the freedom to plan their own workday.
  8. Full-time Work—An independent contractor should be free to accept or reject a job offered by the company.
  9. Place of Business—An independent contractor should possess his or her own place of business separate from that of the company’s.
  10. Work Schedule—An independent contractor will set his or her own work schedule.
  11. Reports—Employees are often required by employers to turn in reports, which are viewed by the IRS as evidence of control.
  12. Method of Payment—Payment to independent contractors should be by the job, rather than by the day or by the hour.
  13. Business/Travel Expenses—An independent contractor should pay for all of his or her own expenses.
  14. Furnishing Tools, Equipment, and Materials—If a company covers the cost of a worker’s tools, materials, or equipment, independent contractor status is weakened.
  15. Significant Investment—The larger the worker’s investment in his or her own business, the more likely the IRS will accept independent contractor status.
  16. Realization of Profit or Loss—An independent contractor should be capable of either realizing a profit or suffering a loss.
  17. Working For More Than One Company—Independent contractor status is strengthened where a worker has a diverse and significant client base. However, a worker can perform services for several companies and still be classified as an employee at of one or all of them.
  18. Making Services Available to the General Public—An independent contractor’s name should be advertised or held out to the general public as being in business for him or herself.
  19. Right to Discharge—While an employer may discharge an employee, parties to an independent contractor agreement have an obligation to terminate their contract with a notice requirement.
  20. Right to Quit—If a worker can terminate employment with a company at any time without incurring liability, it is suggestive of an employee-at-will relationship. An independent contractor, on the other hand, cannot simply walk away from a contractual relationship with a company.

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The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.