In recent years, the Internal Revenue Service (IRS) has sought out
and imposed severe penalties on companies that treat employees as
independent contractors, and which fail to withhold taxes. To avoid the
paperwork burden and expense of payroll taxes, some employers
inappropriately designate workers "independent contractors."
If the IRS determines that the worker is actually an
"employee," the person responsible for the collection and
payment of withholding taxes may be held personally liable for an amount
equal to the taxes that should have been withheld.
The IRS considers 20 factors in determining a worker's status.
Meeting just one of the conditions may qualify the worker as an
employee. If a company is unable to determine the appropriate
designation from the IRS guidelines, the IRS will help. Simply file a
Form SS-8 and the IRS will respond with a determination. A summary of
the IRS position and the 20 factors are provided below: IRS Forms and
To help determine whether an individual is an employee under the
common-law rules, the IRS has identified 20 factors that are used as
guidelines to determine whether sufficient control is present to
establish an employer-employee relationship.
These factors should be considered guidelines. Not every factor is
applicable in every situation, and the degree of importance of each
factor varies depending on the type of work and individual
circumstances. However, all relevant factors are considered in making a
determination, and no one factor is decisive. It does not matter that a
written agreement may take a position with regard to any factors or
state that certain factors do not apply if the facts indicate otherwise.
The 20 factors indicating whether an individual is an employee or an
independent contractor are:
1. Instructions. An employee must comply with instructions
about when, where, and how to work. Even if no instructions are given,
the control factor is present if the employer has the right to control
how the work results are achieved.
2. Training. An employee may be trained to perform services in
a particular manner. Independent contractors ordinarily use their own
methods and receive no training from the purchasers of their services.
3. Integration. An employee's services are usually integrated
into the business operations because the services are important to the
success or continuation of the business. This shows that the employee
is subject to direction and control.
4. Services rendered personally. An employee renders services
personally. This shows that the employer is interested in the methods
as well as the results.
5. Hiring assistants. An employee works for an employer who
hires, supervises, and pays workers. An independent contractor can
hire, supervise, and pay assistants under a contract that requires him
or her to provide materials and labor and to be responsible only for
6. Continuing relationship. An employee generally has a
continuing relationship with an employer. A continuing relationship
may exist even if work is performed at recurring although irregular
7. Set hours of work. An employee usually has set hours of work
established by an employer. An independent contractor generally can
set his or her own work hours.
8. Full-time required. An employee may be required to work or
be available full-time. This indicates control by the employer. An
independent contractor can work when and for whom he or she chooses.
9. Work done on premises. An employee usually works on the
premises of an employer, or works on a route or at a location
designated by an employer.
10. Order or sequence set. An employee may be required to
perform services in the order or sequence set by an employer. This
shows that the employee is subject to direction and control.
11. Reports. An employee may be required to submit reports to
an employer. This shows that the employer maintains a degree of
12. Payments. An employee is generally paid by the hour, week,
or month. An independent contractor is usually paid by the job or on
13. Expenses. An employee's business and travel expenses are
generally paid by an employer. This shows that the employee is subject
to regulation and control.
14. Tools and materials. An employee is normally furnished
significant tools, materials, and other equipment by an employer.
15. Investment. An independent contractor has a significant
investment in the facilities he or she uses in performing services for
16. Profit or loss. An independent contractor can make a profit
or suffer a loss.
17. Works for more than one person or firm. An independent
contractor is generally free to provide his or her services to two or
more unrelated persons or