Independent contractor or employee? The 20-question IRS test
Business owners frequently clash with the IRS over whether workers should be considered employees or independent contractors. You face a higher tax burden when workers are considered employees. To help you determine a worker’s classification, use this 20-question test, which has evolved from various court cases and IRS rulings over the years. Most questions relate to the degree of control that you exert over the worker.
If you answer “Yes” to most of the questions, it generally indicates that you should treat the worker as a common-law employee. More “No” answers than “Yes” will favor independent-contractor status.
Key point: The first few questions are the most decisive. For example, if you answer “No” to the first five questions, the worker is almost certainly an independent contractor, regardless of the answers to the remaining questions.
___ 1. Is there a continuing relationship between the
worker and your company?
___ 2. Are the services required to be completed by a
specific person?
___ 3. Does the worker receive instructions from you?
___ 4. Does the company supply the worker with tools
and materials?
___ 5. Does the worker have any significant investment in
the activity?
___ 6. Are payments based on time rather than completion
of the job?
___ 7. Is the payment arrangement such that the worker
cannot incur a financial loss?
___ 8. Does your company set the working hours?
___ 9. Does your company require a full-time commitment
from the worker?
___ 10. Is your company the worker’s only significant
client or customer?
___ 11. Does the worker forgo offering services to the
public?
___ 12. Does the worker receive training from your company?
___ 13. Are the worker’s services integrated with your
company’s business?
___ 14. Does your company employ assistants for the
worker?
___ 15. Is the work performed on your company’s premises?
___ 16. Is the work performed according to a set sequence
determined by your company?
___ 17. Does your company require the worker to submit
reports?
___ 18. Does your company pay the worker’s business related
expenses?
___ 19. Do you have the right to fire the worker?
___ 20. Does the worker have the right to quit without
penalty?
If you answer “Yes” to most of the questions, it generally indicates that you should treat the worker as a common-law employee. More “No” answers than “Yes” will favor independent-contractor status.
Key point: The first few questions are the most decisive. For example, if you answer “No” to the first five questions, the worker is almost certainly an independent contractor, regardless of the answers to the remaining questions.
___ 1. Is there a continuing relationship between the
worker and your company?
___ 2. Are the services required to be completed by a
specific person?
___ 3. Does the worker receive instructions from you?
___ 4. Does the company supply the worker with tools
and materials?
___ 5. Does the worker have any significant investment in
the activity?
___ 6. Are payments based on time rather than completion
of the job?
___ 7. Is the payment arrangement such that the worker
cannot incur a financial loss?
___ 8. Does your company set the working hours?
___ 9. Does your company require a full-time commitment
from the worker?
___ 10. Is your company the worker’s only significant
client or customer?
___ 11. Does the worker forgo offering services to the
public?
___ 12. Does the worker receive training from your company?
___ 13. Are the worker’s services integrated with your
company’s business?
___ 14. Does your company employ assistants for the
worker?
___ 15. Is the work performed on your company’s premises?
___ 16. Is the work performed according to a set sequence
determined by your company?
___ 17. Does your company require the worker to submit
reports?
___ 18. Does your company pay the worker’s business related
expenses?
___ 19. Do you have the right to fire the worker?
___ 20. Does the worker have the right to quit without
penalty?
