Independent Contractor Tests Series: The IRS Guidelines

As the federal government and state agencies crackdown on businesses that misclassify employees as independent contractors, it is increasingly important that companies correctly classify their workers. But there is no standard regulation for what constitutes a legal independent contractor. This series will examine the different tests and guidance used by the multiple federal and state agencies to determine if workers can be considered independent contractors.When determining whether a worker should be classified as a 1099 independent contractor or a W-2 employee, the first, and often the only, place employers turn is to the IRS. The IRS looks at number of factors to determine if a worker should be an independent contractor or an employee for tax purposes, focusing on the company’s degree or extent of right to direct and control. Those factors that are considered are divided into three categories:

1. Behavioral control—If a company directs and controls (or has the right to direct and control) how the worker performs the task, including providing training and instructions about when, where, and how to provide the service, the worker is more likely to be a W-2 employee.
2. Financial control—Another sign a worker may be a W-2 employee is if the company controls or has a right to control the economic aspects of the worker’s job. A company may be shown to exercise financial control if they reimburse expenses, provide tools and facilities, pay the worker by the hour rather than by the job, and if they are the person’s only source of work.
3. Type of relationship—Facts showing the tie between the parties, including (1) written contracts, (2) whether the worker receives benefits, (3) the duration of the work, and (4) extent to which the services are an aspect of the company’s regular operations.

The IRS clearly points out on its Web site that “There is no ‘magic’ or set number of factors that ‘makes’ a worker an employee or an independent contractor, and no one factor stands alone in making this determination.”Companies also must remember that the IRS guidance is not the only thing to consider. Other federal and state agencies have their own guidelines for what constitutes an independent contractor. Be sure to continue reading this series to learn about other “tests” and regulations related to the classification of workers. In the meantime, if you want to learn more about the factors the IRS considers, visit their “Independent Contractor (Self-Employed) or Employee?” Web page.This article is for informational purposes only and should not be considered legal advice.