The “20 Factor Test” is used by the IRS to evaluate workers to determine whether they are independent contractors or employees.
These factors have been compressed into three general categories: behavioral control, financial control and relationship of the parties. As you look at these factors, you should be aware that the IRS does not look specifically at any one factor, but one factor can be enough to cause the IRS to determine that a worker is an employee. There is no “magic number” of factors which determines status. It is important to note that the IRS assumes that a worker is an employee.
It is sometimes difficult to determine the status of a worker. If you’re unsure whether to classify a worker as an independent contractor or employee, you can file a FormSS-8 to request a determination. The form SS-8 is available here on the IRS Website.
To give you guidance on the issues relating to independent contractors versus employees, here is a discussion of the 20 factors.
- Actual instruction or direction of a worker: A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished.
- Training: Training of a worker by an experienced employee working with him by correspondence, by required attendance at meetings and by other methods is a factor indicating control by the employer over the particular method of performance.
- Integration of services: Integrations of the person’s services in the business operations generally shows that he or she is subject to direction and control.
- Personal nature of services: If the services must be rendered personally, it indicates an interest in the methods, as well as the results. Lack of control may be indicated when the person has the right to hire a substitute with permission or knowledge of the employer.
- Similar workers: Hiring, supervising and payments to assistants on the same job as the worker generally show employer control over the job.
- Continuing relationship: The existence of a continuing relationship between an individual and the person for whom he or she performs services tends to indicate an employer/employee relationship.
- Hours of work: The establishment of set hours of work by the employer bars the worker from being master of his or her own time, which is the right of the independent contractor.
- Full-time work: Full-time work required for the business indicates control by the employer since it restricts the worker from doing other gainful work.
- Work on premises: If the worker is required to do the work on the employer’s premises, employer control is implied, especially where the work is of such a nature that it could be done elsewhere.
- Order of performance: If the order of the performance of services is, or may be, set by the employer, control of the employee may be indicated.
- Submitting reports: The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
- Method of payment: If the manner of payment is by the hour, week or month, an employer/employee relationship probably exists; whereas payment on a commission or job basis is customary where the worker is an independent contractor.
- Payment of expenses: Payment of the worker’s business expenses by the employer indicates control of the worker.
- Tools and materials: The furnishing of tools, materials, etc., by the employer indicates control over the worker.
- Investment: A significant investment by the worker in facilities used in performing services for another tends to show an independent status.
- Profit or loss: The possibility of profit or loss for the worker as a result of services rendered generally shows independent contractor status.
- Exclusivity of work: Work for a number of persons at the same time often indicates independent contractor status because the worker is usually free, in such cases, from control by any firms.
- Available to general public: The availability of services to the general public usually indicates independent contractor status.
- Right of discharge: The right of discharge is that of an employer. An independent contractor, on the other hand, cannot be “fired” without incurring liability if he or she is producing a result that measures up to his or her contract specifications.
- Right to quit: The right to quit at any time without incurring liability indicates an employer/employee relationship.