20 Factor IRS Test
The IRS uses a 20-factor test to determine whether a person is an employee. In connection with this test, the IRS has stated the following:
. . . 20 factors have been identified that indicate whether enough control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending upon the occupation and the context in which the services are performed. It does not matter that the employer allows the employee freedom of action, so long as the employer has the right to control both the method and the result of the services . . . (Business Reporting, I.R.S. Publication 937).
The 20 common law factors are:
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 give instructions. Independent contractors direct themselves as to when, where and how to do their work.
Training: An employee is 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.
Integration: An employee’s services are 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.
Services rendered personally: An employee renders service personally. This shows that the employer is interested in the methods as well as the results. Independent contractors are generally free to hire assistants or to sub-contract their work, since they are directing their own operations and making their own decisions about how to get the job done.
Hiring, supervising and paying assistants: An employee works for an employer who hires, supervises, and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.
Continuing relationship: An employee has a continuing relationship with an employer. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals. An independent contractor ordinarily is hired to do a particular job and then moves on to do work elsewhere for another organization.
Set hours of work: An employee has set hours of work established by an employer. An independent contractor is the master of his or her own time.
Full-time work: An employee normally works full-time for an employer. An independent contractor can work when and for whom he or she chooses.
Work done on employer’s premises: An employee works on the premises of an employer or works on a route or at a location designated by an employer. An independent contractor ordinarily sets his/her own place of work.
Order or sequence set: An individual who must perform services in the order or sequence set by an employer looks like an employee, subject to direction and control.
Oral or written reports: A person who regularly submits reports to a supervisor looks like an employee, who must account to the employer for his or her actions.
Payments: An employee is paid by the hour, week, or month. An independent contractor is paid by the job or on a straight commission.
Expenses: An employee’s business expenses are customarily paid by an employer. This shows that the employee is subject to regulation and control. An independent contractor ordinarily pays for his/her own business expenses.
Tools and materials: An employee is furnished significant tools, materials, and other equipment by an employer (examples in a church: computer, books, music, uniforms).
Investment: An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.
Profit or loss: An independent contractor can make a financial profit or suffer a financial loss, whereas an employee ordinarily does not suffer any financial losses associated with his/her work.
Works for more than one person or firm: An independent contractor offers and ordinarily gives his or her services to two or more unrelated persons or firms at the same time (example: an outside snow removal or lawn service used by a church would do the same work for a number of clients and would be considered an independent contractor; a facilities maintenance person who does full time work for the church that includes snow removal and lawn service and does not have a snow removal/lawn service business for other clients probably would be considered an employee, absent other unique circumstances).
Offers services to general public: An independent contractor makes his or her services available to the general public.
Right to Fire: An employer can fire an employee. An independent contractor typically cannot be terminated so long as he or she produces a result that meets the specifications of the contract for the services.
Right to quit: An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete it.
Primary factors:
Does the person have the right to require compliance with significant instructions?
Does the person have the right to set the hours of work?
Does the person have the right to set the order or sequence of services to be performed?
Does the person have the right to discharge the person?
Does the person have the right to hire, pay, and supervise assistants as the nature of the work requires?
Does the person have no ability to realize a profit or loss?
Does the person have no investment in significant tools, materials, and other equipment when such items are necessary to accomplish the task and are customarily provided by the person?
Does the person have no significant investment in facilities when they are necessary to accomplish the task and they are customarily provided?
Treating employees as nonemployees.
You’ll generally be liable for social security and Medicare taxes and withheld income tax if you don't deduct and withhold these taxes because you treated an employee as a nonemployee. You may be able to figure your liability using special section 3509 rates for the employee share of social security and Medicare taxes and federal income tax withholding. The applicable rates depend on whether you filed required Forms 1099. You can't recover the employee share of social security tax, Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. You’re liable for the income tax withholding regardless of whether the employee paid income tax on the wages. You continue to owe the full employer share of social security and Medicare taxes. The employee remains liable for the employee share of social security and Medicare taxes. See section 3509 for details. Also see the Instructions for Form 941-X.
Section 3509 rates aren't available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Section 3509 isn't available for reclassifying statutory employees. See Statutory employees , earlier.
If the employer issued required information returns, the section 3509 rates are the following.
For social security taxes: employer rate of 6.2% plus 20% of the employee rate of 6.2%, for a total rate of 7.44% of wages.
For Medicare taxes: employer rate of 1.45% plus 20% of the employee rate of 1.45%, for a total rate of 1.74% of wages.
For Additional Medicare Tax: 0.18% (20% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
For income tax withholding, the rate is 1.5% of wages.
If the employer didn't issue required information returns, the section 3509 rates are the following.
For social security taxes: employer rate of 6.2% plus 40% of the employee rate of 6.2%, for a total rate of 8.68% of wages.
For Medicare taxes: employer rate of 1.45% plus 40% of the employee rate of 1.45%, for a total rate of 2.03% of wages.
For Additional Medicare Tax: 0.36% (40% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
For income tax withholding, the rate is 3.0% of wages.
Relief provisions.
If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See Pub. 1976, Do You Qualify for Relief Under Section 530.
IRS help.
If you want the IRS to determine whether a worker is an employee, file Form SS-8.
Voluntary Classification Settlement Program (VCSP).
Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. File Form 8952 to apply for the VCSP. For more information, go to IRS.gov/VCSP.
