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The I.R.S. "20 Factors Test" to Determine Eligibility for Contractor Status See The IRS form SS-8 for more information (http://www.irs.gov/pub/irs-pdf/fss8.pdf).
State
and various agencies use several tests to establish the existence of
an employer/employee relationship. The most common, although not as
comprehensive, is the 20 Factor or Common Law test. The result of the
test will determine the existence (or lack of) the right to control
the worker. The mere right to control a worker is critical. The right
to control is often found to exist through examining various characteristics
of the relationship, and inferring that it is present whether or not
it is executed. Here lies the source of most of the uncertainty surrounding
the issue of control. To date, the IRS has refused to issue definitive
guidelines or a clear cut weighting system for evaluating the various
factors. For this reason, it is important that the evaluation of independent
contractor relationships is performed by experts who can examine circumstances
beyond the 20 Factors Test. 1. Does
the worker receive instruction? An independent contractor is a business,
and businesses don't need instruction on how perform a job or service.
Employees do. 2. Does
the worker require training to perform the service? Training infers
that the company is controlling the manner and means of how the job
is accomplished. Independent business enterprises need no training to
perform the job for which the company was hired. 3. Is
the work being performed integral to the business? If a company
hires a consulting engineer to develop a product that is an integral
part of the company's business, it may be assumed that the company will
maintain the right to control the engineer. To the IRS, this situation
spells employer employee relationship. 4. Must
the services be rendered personally? A true independent contractor
will have the right to use assistants or can subcontract as long as
the product or deliverable meets the standard of acceptance outlined
in the contract. 5. Does
the worker hire, supervise and pay his own assistants? If the hiring
firm hires, supervises and pays the worker's assistants, this indicates
the right to control production from the worker. Independent businesses
hire and pay their own assistants or subcontractors. 6. Is
this an on-going or open-ended relationship? If you have a worker
on a project with no specified end, it may appear to be an employer/employee
situation, in the eyes of a government. The tax agencies recognize part-time
employment as just that: employment. 7. Does
the worker have to work hours set by the firm? This obviously indicates
control. 8. Is
the worker required to work full-time for the hiring firm? Being
required to work full time or a 40-hour week indicates control of the
worker's time and his ability to assume other clients and expand his
business. 9. Is
the worker required to perform services on company premises? The
requirement to work on premises indicates the need for the hiring firm
to maintain the right to control the worker. It also indicates that
the worker is being treated and supported like a W-2 employee of the
company. 10. Do
you set the order or sequence of the work? If the hiring company
is controlling the worker to the degree that they are setting the order
and sequence of the work, there is obvious control. 11. Is
the worker required to provide regular reports on the project? Regular
reports on progress toward deadlines or hours worked (time logs) indicate
control. 12. Is
the worker's pay based on units of time (hour, week, month)? Payments
based upon time indicate control; the hiring firm is asking for an accounting
of the worker's time. This is similar to W-2 employees of the company.
13. Are
the worker's business or traveling expenses paid by the hiring firm?
Employees are reimbursed for expenses. An independent contractor will
figure in overhead expenses when formulating a bid for the project. 14. Does
the company furnish the tools or supplies used to perform the service?
An independent business enterprise should have the tools and supplies
to do a job. Using company supplies poses a similarity to W-2 and control.
15.
Does the worker have a significant investment in his business? The
IRS does not recognize a home office, fax, email and business card as
a significant investment. They like to see recurring and ongoing expenses
such as office rent, marketing expenses, employees, business expenses,
etc. 16. Can
the worker realize a profit or suffer a loss? An independent contractor
is considered to be a business and can realize a profit while an employee
cannot. Therefore, if there is no opportunity for profit or loss, the
person appears to be an employee. 17.
Does the worker have other clients? Multiple clients reinforce the
idea that you have hired a real contractor with a real business. If
the hiring company is the worker's only client, there is control and
dependency for income. 18. Does
the worker offer services to the public? Businesses must market
their services to the public in order to survive. If the contractor
is not marketing, and is dependent on your firm for total income, the
hiring company is in control. 19. Do
you have the right to fire the person at will, without incurring liability?
An independent contractor cannot be fired as long as he or she meets
the specifications and deliverables of the contract. By terminating
the contract without just cause, the firm risks a breach of contract
action. 20. Does
the worker have the right to quit at will, without incurring liability?
A contractor is bound to complete a contract or incur some sort of liability
to the recipient of the service. An employee may quit at any time. (Most
relationships do not neatly fit into this set of factors. This is what's
known affectionately as The Gray Area.) Source:
Advanced Business Environments; 1998; http://www.abe1099.com
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