Determine the Status of the Contractor
An independent contractor is a worker who individually contracts with an employer to
provide specialized or requested services on an as-needed or project basis. This individual is
free from control and direction of the performance of their work, and the individual is
customarily engaged in an independent trade, occupation, profession or business.
View Independent Contractors IRS 20-Factor Test
Independent contractors have greater control over the way they carry out their work than
employees. Employers assume fewer duties with respect to independent contractors than
employees.
Independent contractors are generally outside the coverage of various laws that apply to the
employer-employee relationship. An employer must exercise extreme caution when classifying
a worker as an independent contractor. This is especially important when it comes to issues
such as pension, workers' compensation, and wage and hour law. Employers do not withhold
federal, state and local taxes from wages paid to independent contractors, they are not
included in an employer's benefits programs, are exempt from wage and hour, employment
discrimination laws and unemployment insurance. Therefore, the penalties for misclassifying
a worker can be huge. Penalties can include back taxes or premiums, civil fines, interest and
other retroactive damages.
The independent contractor relationship is beneficial to both parties, so pursuing an
independent contractor arrangement is a practical way to do business for employers. The IRS
has developed guidelines to help employers correctly classify their employment relationships.
The IRS follows the common law test for determining whether an individual is an employee
for federal employment tax purposes. Under the common law test an employer-employee
relationship exists if the person for whom services are performed has the right to control and
direct a worker in results, specific details and the means by which the results are
accomplished.
The "Reasonable Basis" test provides a "safe harbor" to employers, which bars the IRS from
challenging the status of workers as independent contractors if certain conditions are met. If
the following conditions are met the employer does not have tax liability for workers under
Section 503 and the IRS cannot penalize an employer for misclassifying a worker as an
independent contractor:
• The employer has always treated the worker as an independent contractor.
• The employer has filed all returns for the worker for all periods after 1978 and the
returns were consistent with independent contractor status.
• The employer had a reasonable basis for treating workers as an independent contractor
by either relying on judicial precedent, published rulings or technical advice, a prior IRS
audit showing no penalties assessed for similarly situated workers, or a longstanding
recognized practice of a significant segment of the industry in which the individual worked.
The IRS developed the 20-Factor Test to help employers evaluate whether a worker is an
employee or an independent contractor. No one factor on the test is more indicative of
employee status than another. If there is a high number of "yes" marks, then it will most
likely indicate the presence of an employment relationship, a high number of "no" marks may
or may not indicate a contractor relationship. Therefore, it is best for employers to err on the
side of caution and to pursue an IRS ruling
provide specialized or requested services on an as-needed or project basis. This individual is
free from control and direction of the performance of their work, and the individual is
customarily engaged in an independent trade, occupation, profession or business.
View Independent Contractors IRS 20-Factor Test
Independent contractors have greater control over the way they carry out their work than
employees. Employers assume fewer duties with respect to independent contractors than
employees.
Independent contractors are generally outside the coverage of various laws that apply to the
employer-employee relationship. An employer must exercise extreme caution when classifying
a worker as an independent contractor. This is especially important when it comes to issues
such as pension, workers' compensation, and wage and hour law. Employers do not withhold
federal, state and local taxes from wages paid to independent contractors, they are not
included in an employer's benefits programs, are exempt from wage and hour, employment
discrimination laws and unemployment insurance. Therefore, the penalties for misclassifying
a worker can be huge. Penalties can include back taxes or premiums, civil fines, interest and
other retroactive damages.
The independent contractor relationship is beneficial to both parties, so pursuing an
independent contractor arrangement is a practical way to do business for employers. The IRS
has developed guidelines to help employers correctly classify their employment relationships.
The IRS follows the common law test for determining whether an individual is an employee
for federal employment tax purposes. Under the common law test an employer-employee
relationship exists if the person for whom services are performed has the right to control and
direct a worker in results, specific details and the means by which the results are
accomplished.
The "Reasonable Basis" test provides a "safe harbor" to employers, which bars the IRS from
challenging the status of workers as independent contractors if certain conditions are met. If
the following conditions are met the employer does not have tax liability for workers under
Section 503 and the IRS cannot penalize an employer for misclassifying a worker as an
independent contractor:
• The employer has always treated the worker as an independent contractor.
• The employer has filed all returns for the worker for all periods after 1978 and the
returns were consistent with independent contractor status.
• The employer had a reasonable basis for treating workers as an independent contractor
by either relying on judicial precedent, published rulings or technical advice, a prior IRS
audit showing no penalties assessed for similarly situated workers, or a longstanding
recognized practice of a significant segment of the industry in which the individual worked.
The IRS developed the 20-Factor Test to help employers evaluate whether a worker is an
employee or an independent contractor. No one factor on the test is more indicative of
employee status than another. If there is a high number of "yes" marks, then it will most
likely indicate the presence of an employment relationship, a high number of "no" marks may
or may not indicate a contractor relationship. Therefore, it is best for employers to err on the
side of caution and to pursue an IRS ruling
Determine the Status of the Contractor