IRS 20 Factor Test: Employee vs. Independent Contractor

What’s New?

The IRS uses a 20 factor test when considering whether a worker is an employee or independent contractor.  With a new final rule set to go into effect on March 11, 2024, it’s a good time to review these factors, as well as how workers are classified within your organization.

What are the 20 Factors?

When considering whether a worker is an employee or independent contractor, you should ask yourself these questions:

1. Instructions – Do we provide instructions on when, where, how to do the work?
2. Training – Do we train the worker?
3. Subcontracting – Can the worker subcontract part of the work, or does the worker have to perform the work?
4. Control of Workforce – Is the worker allowed to hire and terminate their own workers?
5. Length of Employment – how long will the worker be expected to work for us?
6. Schedule – Did we set the schedule?
7. Full Time Work – Are they working full-time for us?
8. Order or sequence – Do we require the work to be done in a specific order or sequence?
9. Work on premise – Does the work have to be done at our office or work space?
10. Reports – Do we require the worker to provide reports and status updates?
11. Pay – Do we pay the worker by the hour, week, month, or job?
12. Expenses – Are we paying or reimbursing the worker for expenses?
13. Tools and Materials – Do we provide tools to the worker?
14. Investment – Does the worker have investment in the essential tools and/or facilities where work is performed?
15. Profit / Loss – Can the worker suffer a profit or loss on the job depending on their performance?
16. Integration – Is the worker doing work that is vital to our operation?
17. Exclusivity – Does the worker perform work for more than one company at a time?
18. Availability – Does worker make their services available to the general public?
19. Termination – Can our company fire the worker without liability?
20. Resignation – Can the worker quit without liability?

Overview:

All 20 factors are related to these 3 items:

1. Behavioral Control – Does the company have the right to control how the worker performs their services?
2. Financial Control – Are the business aspects of the worker’s services controlled by the company?
3. Relationship of the Parties – Is the relationship between the worker and the company defined in legal documents?  Does the company provide insurance for the worker?  Are the worker’s services a vital part of the company’s operations?

Fines and penalties assessed due to misclassification of workers could be devastating for businesses.  Time & Pay clients have access to complimentary consultations through SESCO HR Management.  If you have questions or concerns about how certain workers in your organization are classified, contact us today!