Business owners frequently clash with the IRS over whether workers should be considered employees or independent contractors. You face a higher tax burden when workers are considered employees. To help you determine a worker’s status, use this 20-question test, which has evolved from various court cases and IRS rulings over the years. Most questions relate to the degree of control exerted over the worker.
If you answer “Yes” to most of the questions, it generally indicates that you should treat the worker as a employee. More “No” answers than “Yes” will favor independent-contractor status.
The first few questions here, are the most decisive. For example, if you answer “No” to the first five questions, the worker is almost certainly an independent contractor, regardless of the answers to the remaining questions. The “test” isn’t an end all to the independent contractor determination, but it is a good starting point.
___ 1. Is there a continuing relationship between the worker and your company?
___ 2. Are the services required to be completed by a specific person?
___ 3. Does the worker receive instructions from you?
___ 4. Does the company supply the worker with tools and materials?
___ 5. Does the worker have any significant investment in the activity?
___ 6. Are payments based on time rather than completion of the job?
___ 7. Is the payment arrangement such that the worker cannot incur a financial loss?
___ 8. Does your company set the working hours?
___ 9. Does your company require a full-time commitment from the worker?
___ 10. Is your company the worker’s only significant client or customer?
___ 11. Does the worker forgo offering services to the public?
___ 12. Does the worker receive training from your company?
___ 13. Are the worker’s services integrated with your company’s business?
___ 14. Does your company employ assistants for the worker?
___ 15. Is the work performed on your company’s premises?
___ 16. Is the work performed according to a set sequence determined by your company?
___ 17. Does your company require the worker to submit reports?
___ 18. Does your company pay the worker’s business related expenses?
___ 19. Do you have the right to fire the worker?
___ 20. Does the worker have the right to quit without penalty?
These questions are not the only “test” in identifying the status of the individual is an Independent Contractor. Also, criteria such as this will also be used for determination of an individuals’ status as it relates to workers compensation or possibly, your company general liability insurance policy.
It is advisable that you talk with your legal advisor and insurance agent for clarification or you may get surprised when it gets to audit time!