Here’s a comprehensive guide to classifying workers based on the IRS 20 factor test.
RELATED: Independent Contractor VS Employee: 4 Differences Taxpayers Need To Know
In this article:
- What Is the Level of Instruction?
- Is There Skills Training Involved?
- What Is the Worker’s Level of Business Integration?
- Is the Worker Expected to Personally Accomplish Tasks on Behalf of a Business?
- Is the Business in Control of a Worker’s Assistant/s?
- Is There a Continuous Professional Relationship?
- Are Working Hours Specified by the Employer?
- Is the Worker Expected to Render a Full Day of Work?
- Are Services Rendered Within Company Premises?
- Does the Employer Demand Order by Which a Task Must Be Accomplished?
- Is the Worker Expected to Write Work-Related Reports?
- What Is the Payment Method Used?
- Are Paid-for Business Travels Included in the Contract?
- Are There Materials and Tools Provided?
- Are There Work Facilities Provided?
- Does the Worker Earn a Preset Amount?
- Does the Worker Render Services to Multiple Bosses?
- Are the Worker’s Services Available to the General Public?
- Is Abrupt Worker Discharge a Possibility?
- Does the Worker Possess Right of Termination?
What Is the IRS 20 Factor Test?
The IRS 2o factor test uses 20 guidelines to determine whether a worker falls under the employee or independent contractor classifications. Businesses specify these categories in the IRS Form SS-8.
It is crucial for employers to understand the distinction between the two aforementioned types of workers, considering the serious penalties that can result from employee misclassification.
These three categories sum up the considerations outlined in the IRS 20 factor test:
- Financial Control
- Behavioral Control
- Relationship of the Parties
Now let’s get into the details. These are the relevant questions you must answer when considering an employee’s true status.
1. What Is the Level of Instruction?
Independent contractors render services on their own terms. If a business demands how, where, and when to do a particular job, it’s indicative of employment.
2. Is There Skills Training Involved?
Independent contractors are hired primarily on their existing expertise. If a business feels the need to provide sponsored training for a hired worker, it is most likely an employer and employee relationship.
3. What Is the Worker’s Level of Business Integration?
A worker directly integrated into the operations of a business speaks more of employment. Meanwhile, independent contractors regard businesses as clients and are therefore separate entities from them.
4. Is the Worker Expected to Personally Accomplish Tasks on Behalf of a Business?
One perk of rendering services as an independent contractor is that one is allowed to subcontract the entire job or parts of it. If a business expects workers to personally accomplish the job they have been hired for, then they must be employees.
5. Is the Business in Control of a Worker’s Assistant/s?
If a business hires and supervises assistants to work under a hired worker, that worker counts as an employee. This means that independent contractors hire, supervise, and pay their own assistants should they need additional human resources.
6. Is There a Continuous Professional Relationship?
Independent contractors work on a per-project basis. This means they do not need to have a continuous professional relationship with the businesses for whom they render services.
This is different from employees who are more or less in perpetual connection with their employers, at least until resignation or termination.
7. Are Working Hours Specified by the Employer?
Most employees typically work 9 to 5. Meanwhile, independent contractors have the prerogative to choose their own working schedule, so long as they deliver their assigned tasks.
8. Is the Worker Expected to Render a Full Day of Work?
Employees normally render nine-hour shifts or a full day’s worth of work for one boss. Conversely, independent contractors usually juggle several gigs from different clients.
9. Are Services Rendered Within Company Premises?
If a business demands that a worker accomplish their job within company premises, it speaks of an employment relationship. Independent contractors have the freedom to work remotely.
10. Does the Employer Demand Order by Which a Task Must Be Accomplished?
Independent contractors have their own way of doing their job. Bosses who impose a specific order by which a task must be done are courting employee territories.
RELATED: What Are The Penalties Employers Will Face Under Employee Misclassification?
11. Is the Worker Expected to Write Work-Related Reports?
Part of an employee’s job requirement is to regularly submit work-related reports. The same rule does not apply to independent contractors, whose main goal is to deliver results.
12. What Is the Payment Method Used?
Companies pay independent contractors per project. If they start paying a worker in hourly, daily, weekly, or monthly rates, they have basically hired an employee.
13. Are Paid-for Business Travels Included in the Contract?
One reason why independent contractors charge high professional fees is that they are expected to pool their own resources. A business paying for a worker’s official travels may be in an employer and employee relationship.
14. Are There Materials and Tools Provided?
Again, independent contractors invest in tools and materials required for them to their job efficiently. If a business provides these resources, they are working with an employee.
15. Are There Work Facilities Provided?
Another indicator of employee relationship is if a business provides facilities to its worker. Independent contractors rely on their own work facilities.
16. Does the Worker Earn a Preset Amount?
On top of their professional fee, independent contractors sometimes have the privilege of gaining profit from their rendered services, as outlined in their contracts. Conversely, they could also suffer from financial loss should their work results fail.
Meanwhile, employees earn a fixed amount specified in their employment contract.
17. Does the Worker Render Services to Multiple Bosses?
Independent contractors normally cater to different clients simultaneously. A worker exclusively rendering services to one boss most often counts as an employee.
18. Are the Worker’s Services Available to the General Public?
A contract binds an employee to a specific employer. The same rule does not apply to independent contractors.
Despite signed project-specific contracts, an independent contractor’s professional freedom does not get limited.
19. Is Abrupt Worker Discharge a Possibility?
Independent contractors know the duration of their business relationship with a particular client based on their agreed terms. Employees, on the other hand, are at the mercy of their employers, who can discharge them any time they deem necessary.
20. Does the Worker Possess Right of Termination?
Employees can quit their job without legal culpability. Meanwhile, independent contractors cannot leave a project without completing it.
Doing so will lead to repercussions as outlined in their contract.
Culpability Definition: responsibility for a failure or wrongdoing
The IRS 20 factor test exists to make worker classification easier for business owners. If in doubt, refer to this employee classification guideline so as to refrain from making avoidable mistakes.
What are your thoughts about the IRS 20 factor test? Please share them in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
Up Next:
- Can The IRS Close Down A Business For Back Taxes
- How To Deal With The IRS And Your Small Business Tax Debts
- Business VS Hobby: How The IRS Qualifies Hobby Income As A Business
