Employee vs. Subcontractor: IRS Guidelines
The IRS has developed a list of 20 factors it uses to determine employee or subcontractor status. The Mass Division of Unemployment Assistance (DUA) generally conforms to these, as well.
The IRS guidelines fall into three main categories:
Behavioral Control
Financial Control
Relationship of the Worker and Firm
Behavioral Control
Does the business provide training to the worker?
An independent contractor generally provides their own training and/or licensing or certification.
Does the business require the worker to follow their instructions on how work is to be performed?
This will generally indicate an employee; an independent contractor makes their own decisions on how best to complete a task or project.
Does the business determine the order or sequence in which work is completed?
Routines and schedules established by the business for a worker suggest the worker is an employee.
Does the business require oral or written reports or require the worker to attend staff meetings?
Independant contractors may provide status reports or attend meetings, but if the business requires them to attend regularly scheduled staff meetings or provide ongoing reports detailing work completed, time spent, etc., this indicates employee status.
Does the business set the worker’s schedule and hours?
Independent contractors set their own work schedules around the needs of their clients and their other work.
Does the business hire, supervise and/or pay the worker’s assistants?
This suggests the worker is an employee. An independent contractor hires and supervises their own assistants and is responsible for any payments to them.
Does the business require the worker to perform all services personally?
An independent contractor should have the option of subcontracting out portions of a job to others, or of having their own employees perform various tasks.
Financial Control
Does the business provide the workspace?
Someone who works off-site in their own office or workspace is more likely to be an independent contractor.
Does the business provide tools and equipment for the worker?
Independent contractors generally provide their own tools and equipment. Employees generally use tools and equipment belonging to the business.
Does the business pay expenses?
Independent contractors may bill for expenses or reimbursements, but if the business they are working with provides routine supplies, arranges and pays for travel, etc. it usually means it has the ability to regulate and direct business activities, indicating an employee status.
Does the business pay by the hour, week or month?
This will suggest someone is an employee; independent contractors are often paid a flat rate for completion of a specific project. If the business provides paid time off (vacation, sick time, etc.) or other benefits to the worker in addition to any pay, they are almost certainly an employee.
Does the worker have a significant investment in their own facilities?
If a worker owns or rents their own office or work space and provides their own equipment, tools, machinery, etc., they are probably an independent contractor.
Does the worker have profits and losses independent of the business they are providing services to?
If they do and those profits and losses are for similar services, they are probably an independent contractor.
Relationship of the Worker and Firm
Does the business have the right to discharge the worker at any time?
This suggests employee status; an independent contractor often may not be discharged until the contract is completed, unless they are not meeting contract specifications.
Does the worker have the right to quit at any time?
An employee may quit at any time while an independent contractor may be liable for failure to complete a contract.
Does the worker have multiple clients?
Working with multiple clients generally indicates independent contractor status.
Are the worker’s services a substantial or integral part of the business?
If yes, it suggests the business maintains control and direction over the worker, making them an employee.
Does the worker market their services to the general public?
Employees don’t market their services or make themselves available to the general public. Independant contractors may be listed in a chamber of commerce or trade association directory, have a website or yellow pages ad, and business cards or other marketing or advertising materials.
Does the business have an ongoing relationship with the worker?
Even a seasonal relationship suggests the worker may be an employee.
Does the business require the worker full-time?
An independant contractor may work full-time for a single client for a short time to complete a task or meet a deadline, but if the business requires this for extended periods, it suggests the worker is an employee because they are unable to work with other clients.
In Summary:
What all these factors try to determine is whether or not an employer has the right to control what a worker does and how and when he or she does it, as well as how much financial risk the worker has taken on for themselves or how much they have invested in their own business. The more control a business has over a worker, the more likely they should be classified as an employee. The more financial risk the worker has in terms of business profit and loss, or the greater their own investment in tools, equipment and facilities, the more likely they are to be classified as an independent contractor. If a person falls into the employee status on more than 8-9 of the IRS guidelines, you should probably play it safe and classify them as an employee.
Next: Massachusetts Guidelines
