Independent Contractors – Guidelines
Independent Contractor Or Employee ? Check The 20 Questions.
The IRS and the courts traditionally rely on a 20-factor test to decide if your company has enough control over a worker to categorize him as an “employee.” (IRS Revenue Ruling 87-41)
However, the questions may be inconclusive since some may not apply to your situation. And there is no “magic number” to which you must answer “no” in order to prove you have a bonafide contractor. To make matters worse, the IRS doesn’t officially indicate which factors are the most important.
Here are the IRS questions from the most important to the least important to the least important. “Yes” answers indicate a common law employee, while “no” answers imply and independent contractors.
- Is there a continuing relationship?
- Are there services rendered personally (by a designated individual)?
- Does the person receive instructions about when, where and how to work?
- Does the employer supply tools and materials?
- Does the worker have money invested? (Independent contractors often have a significant investment in equipment, facilities and materials)
- Are payments based on time, rather than job completion? (Employees are generally paid by the hour, week or month)
- Is it impossible for the worker to lose money on the deal? (An independent contractor can sometimes incur a loss while an employee generally has no such risk)
- Is training required? (Employees may be trained while contractors ordinarily use there own methods)
- Does the worker forgo offering services to the public? (An independent contractor generally makes his services available to the general public)
- Does the worker only have one “client” or “customer”? (Independent contractors are free to provide services to two or more businesses.)
- Are the workers services integrated with the employers business? (An employee’s service is usually important to the business. A contractor is often hired to achieve a one-time result.)
- Are the working hours set?
- Does the employer hire assistants for the worker? (Contractors usually hire and pay their assistants.)
- Is work done on the premises?
- Is a full-time commitment required?
- Is the work performed according to a sequence set by an employer?
- Does the employer pay the workers business and travel expenses? (Contractors often pay their own way)
- Is there a right to fire? (An independent contractor generally cannot be fired as long as the specifications of the contract are met.)
- Can the worker quit? (Employees can usually quit any time without incurring liability. Independent contractors are usually responsible for completing jobs satisfactorily.)
- Are reports or oral reports required? (IRS audit guidelines indicate this factor is not important)
Remember: Even when the questions indicate the worker as an employee, you may qualify for “Section 530 relief.”