The IRS 20 Factor Test: Independent Contractor vs. Employee

The distinction between an independent contractor and an employee is an important one, both for workers and for the companies that hire them. This is because the two types of workers have different rights and responsibilities under the law, including tax obligations, benefits, and legal liability.

To help determine whether a worker is an independent contractor or an employee, the IRS has developed a 20 factor test. This test looks at various aspects of the working relationship between the worker and the company, including:

1. The degree of control the company has over the worker’s work

2. Whether the worker is paid hourly or by the job

3. Whether the worker is reimbursed for expenses

4. Whether the worker provides his or her own tools and supplies

5. Whether the worker works for other companies at the same time

6. Whether the worker can be fired at any time

7. Whether the worker is trained by the company

8. Whether the worker has a continuing relationship with the company

9. Whether the worker has a set schedule or can work whenever he or she wants

10. Whether the worker is required to work on the company’s premises

11. Whether the worker is required to follow specific instructions

12. Whether the worker is paid on commission

13. Whether the worker has a business license or carries liability insurance

14. Whether the worker provides his or her own benefits

15. Whether the worker is paid for vacation or sick time

16. Whether the worker is required to attend company meetings

17. Whether the worker is required to wear a uniform

18. Whether the worker is eligible for overtime pay

19. Whether the worker is eligible for workers’ compensation

20. Whether the worker is eligible for unemployment insurance

The IRS uses these factors to determine whether a worker is an independent contractor or an employee. Generally speaking, if a worker is classified as an independent contractor, he or she is responsible for paying his or her own taxes and providing his or her own benefits, while a worker classified as an employee is entitled to certain benefits and protections under the law.

It is important for both workers and companies to understand the distinction between independent contractors and employees, and to ensure that workers are properly classified. Misclassifying a worker can result in penalties and legal action, so it is important to consult with an experienced tax professional or attorney if you are unsure of your classification.

Overall, the IRS 20 factor test provides a useful framework for determining whether a worker is an independent contractor or an employee. By evaluating the various aspects of the working relationship between the worker and the company, the test helps ensure that workers are properly classified and that companies are in compliance with the law.