The Famous IRS “20 Factors” Used to Determine Whether a Worker is an Independent Contractor – Revenue Rule 87-41
The 20 common law factors listed below are not always present in every case. The IRS and state authorities know that some factors do not apply to certain occupations. The weight to be given each factor is not always constant. In other words, each factor is not automatically worth 5%. The degree of importance of each one may vary depending on the occupation and the reason for existence. Therefore, in each case, an IRS agent or state employment tax examiner must usually take into consideration two primary questions: (1) Does the factor exist? and (2) What is the reason for or importance of its existence or nonexistence?
Does the EDD use these same 20 factors in deciding California Employment Tax issues? Well, yes and no. You see, the EDD also has a list of factors; many more than 20. However, the EDD will often decide a case using the IRS standards if it is in their best interest to do so. Technically, the EDD is suppose to use its own factors, but this is a mere technicality.
Here are the 20 key factors found in Rev. Rul. 87-41 (1987-1 CB 296):
1. Instructions: A person who is required to comply with specific instructions about the time, place and manner of work is usually considered an employee. If the employer has a right to require compliance with instructions, an employment relationship will usually be found to exist.
2. Training: If the employer provides a training program or the individual is under some type of apprenticeship, an employee relationship will be found to exist. An independent contractor ordinarily uses his or her own methods and receives no training from the purchaser of the services. In fact, it is usually the independent contractor’s methods which bring him or her to the attention of the purchaser.
3. Integration: How well do the person’s services fit into the overall business operation? The more they fit in (i.e., the more they are “integrated”), the greater chance that an employer-employee relationship exists.
4. Services Rendered Personally: If the services must be rendered personally, there is a presumption that the employer is very interested in the methods as well as the results.
5. Hiring, Supervising, and Paying Assistants: This generally shows control over the personnel on the job. Control seems to be synonymous with the employer-employee relationship (see also Rev. Rul. 70-440, 1970-2 CB 209).
6. Continuing Relationship: The longer the continuing relation, the greater the presumption that it is one of employer-employee.
7. Set Hours of Work: This, again, is a control factor. The more control the employer has, the greater is the chance that an employer-employee relationship exists.
8. Full Time Required: If the worker must devote full time to the business of the employer, the employer has control over the amount of time the worker spends working and impliedly restricts the worker from doing other gainful work for third persons in the normal course of business.
9. Doing Work on the Employer’s Premises: This is not necessarily a sign of control. Many independent contractors must perform their services on the premises. However, the use of a desk space, telephone or stenographic service or the use of heavy equipment, such as in the machine tool business, usually indicates and employer-employee relationship.
10. Order or Sequence Set: If the worker must perform the work in a sequence set by the business, then he or she is more likely an employee.
11. Oral or Written Reports: If the worker has to continuously submit oral or written reports to the employer or to the supervisors or foremen, this usually indicates a subservient relationship and one of employer-employee.
12. Payment by Hour, Week, or Month: Regular periodic paychecks indicate an employer-employee relationship. Usually, independent contractors get paid in a lump sum, or a lump sum is agreed to be paid in installments.
13. Payment of Business and/or Travel Expenses: If the employer pays the person for business and/or traveling expenses, the person is ordinarily an employee. On the other hand, a person who is paid by the job and who has to take care of his or her own incidental expenses is generally an independent contractor.
14. Furnishing of Tools, Machinery and Materials: The fact that an employer furnishes tools, machinery, equipment, and materials tends to show the existence of an employer- employee relation; however, this is not always the case. I remember that one of the very first cases that I had as a young lawyer involved individuals working in a machine shop. I was able to prove that it was impractical for these people to bring any heavy equipment into and out of the shop.
15. Significant Investment: Investment by the person in facilities used in performing services for another is a factor that tends to establish an independent contractor.
16. Working for More Than One Firm: A person who works for a number of persons or firms at the same time is generally an independent contractor.
17. Realization of Profits or Losses: One who puts assets at risk and who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor. An opportunity for profit and loss may be established by one or more of a variety of circumstances:
a. The individual hires, directs, and pays assistants;
b. The individual has an office, equipment, materials and work facilities;
c. The individual has a business reputation at stake;
d. The individual has exposure to liabilities in the ordinary course of business; and
e. The individual may bid on specific jobs and therefore run the risk of overbidding or underbidding.
18. Making Services Available to the General Public: This factor usually indicates an independent contractor status. However, some independent contractors, such as certain aerospace defense specialists in electronic technology, are hired on a fairly long-term basis that occupies all of their time.
19. Right to Hire and Fire: The right to hire and fire is a very important factor in determining whether an individual is an employee or an independent contractor.
20. Right to Terminate: Generally, an employee has the right to terminate a relationship with an employer at any time without incurring a liability. This is particularly true if the employee is not under a written contract. On the other hand, independent contractors usually work under a written contract and do not have the right to terminate at will.