Independent Contractor Employee? – IRS Revenue Ruling 20 Factor Test
The status of independent contractor vs. employee carries with it many tax ramifications thus utilizing the appropriate classification is key. For example, an employee shares the costs of Social Security and Medical taxes with his or her employer; whereas an independent contractor is responsible for the entire amounts. Independent contractors must pay estimated taxes each quarter, whereas employees generally have taxes withheld from their paychecks by their employer.
Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a University exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.
A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker's status. The individual circumstances of each case determine the weight IRS assigns different factors.
NOTE: Employers uncertain about how to classify a worker can request an IRS determination by filing Form SS-8, "Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding." However, some tax specialists caution that IRS usually classifies workers as employees whenever their status is not clear-cut. In addition, employers that request an IRS determination lose certain protections against liability for misclassification.
The 20 factors from Revenue Ruling 87-41 used to evaluate the validity of independent contractor classifications include:
- Level of instruction. If the University directs when, where, and how work is done, this control indicates a possible employment relationship.
- Amount of training. Requesting workers to undergo University provided training suggests an employment relationship since the University is directing the methods by which work is accomplished.
- Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
- Extent of personal services. Universities that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
- Control of assistants. If a University hires, supervises, and pays a worker's assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
- Page 2 of 2 6. Continuity of relationship. A continuous relationship between a University and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
- Flexibility of schedule. People whose hours or days of work are dictated by a University are apt to qualify as its employees.
- Demands for full-time work. Full-time work gives a University control over most of a person's time, which supports a finding of an employment relationship.
- Need for on-site services. Requiring someone to work on University premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship.
- Sequence of work. If a University requires work to be performed in specific order or sequence, this control suggests an employment relationship.
- Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
- Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
- Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a University suggests an employment relationship.
- Provision of tools and materials. Workers who perform most of their work using University-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
- Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
- Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
- Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
- Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
- Control over discharge. A University's unilateral right to discharge a worker suggests an employment relationship. In contrast, a University's ability to terminate independent contractor relationships generally depends on contract terms.
- Right of termination. Most employees unilaterally can terminate their work for a University without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.