FAQ

What test does the IRS use to determine whether a worker is an employee or an independent contractor?

What test does the IRS use to determine whether a worker is an employee or an independent contractor?

The IRS uses the common law "right of control" test to determine worker status. Under this test, workers are employees if the people they work for have the right to direct and control the way they work-including the final results and the details of when, where and how the job is accomplished.

In contrast, independent contractors are not controlled by the firms that hire them. A hiring firm's control is limited to accepting or rejecting the final results that an independent contractor achieves.

The IRS looks at a number of factors when determining whether a worker is an employee or an independent contractor. These include whether a worker:

• can earn a profit or suffer a loss from the activity
• can be fired by the hiring firm
• furnishes the tools and materials needed to do the work
• is paid by the job or by the hour
• works for more than one firm at a time
• invests in equipment and facilities
• pays his or her own business and traveling expenses
• has the right to quit without incurring liability
• receives instructions from the hiring firm
• is told in what sequence or order to work by the hiring firm
• receives training from the hiring firm
• performs the services personally
• hires and pays assistants
• sets his or her own working hours
• works full-time for the hiring firm
• provides regular oral or written progress reports to the hiring firm, and
• provides services that are an integral part of the hiring firm's day-to-day operations.

What tests do agencies besides the IRS use to determine whether a worker is an employee or an independent contractor?

State workers' compensation, unemployment compensation and tax agencies use various tests to determine worker status. Many use the common law right of control test, but emphasize different factors than the IRS. Some use an economic reality test that focuses on whether a worker is economically dependent upon a hiring firm.

Many state unemployment compensation agencies use a special statutory test, also called the ABC test.

This test focuses on just a few factors:

• whether the hiring firm controls the worker on the job
• whether the worker is operating an independent business, and
• where the work is performed -- that is, where the hiring firm says or where the worker wants to work.

Should I use written agreements when I do independent contract work for clients?

Absolutely. Using a written agreement avoids disputes by providing a written description of the services you're supposed to perform, when they are to be performed and how much you will be paid.

A written independent contractor agreement can also help establish your independent contractor status. Although an agreement by itself is never enough to make a worker an independent contractor, it will help show the IRS and other agencies that both you and the hiring firm intended to create a hiring firm-independent contractor relationship, not an employer-employee relationship.

IRS training materials state that where all the other factors are evenly balanced, a written client agreement may tip the scale to the independent contractor side. But remember, an independent contractor agreement is only useful if it's obeyed. It will be useless if you act and are treated like an employee.

Copyright © 2002 Nolo

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

View Previous Months' Selections