Employment Law FAQ

What test does the IRS use to determine whether workers are ICs or employees?

Under the IRS test, workers are employees if the people they work for have the right to direct and control them in the way they work -- both as to the final results and as to the details of when, where and how to work.

In contrast, ICs are not controlled by the companies that hire them. A hiring firm's control is limited to accepting or rejecting the final results an IC achieves.

The IRS has developed a list of 20 factors it uses to measure control under the common law test. These include whether a worker:

can earn a profit or suffer a loss from the activity
is told where to work by the hiring firm
offers his or her services to the general public
can be fired by the hiring firm
furnishes the tools and materials needed to do the work
is paid by the job or by the hour
works for more than one firm at a time
has a continuing relationship with the hiring firm
invests in equipment and facilities
pays his or her own business and traveling expenses
has the right to quit without incurring liability
receives instructions from the hiring firm
is told in what sequence or order to work by the hiring firm
receives training from the hiring firm
performs the services personally
hires and pays assistants
sets his or her own working hours
works full-time for the hiring firm
provides regular oral or written progress reports to the hiring firm, or
provides services that are an integral part of the hiring firm's day-to-day operations.

Note: The IRS has recently issued a new training manual discussing the 20-factor test. The manual deemphasizes some factors that were formally considered important.

What tests do agencies besides the IRS use to determine whether a worker is an employee or an independent contractor?

State workers' compensation, unemployment compensation and tax agencies use various tests to determine worker status. Many use the common law right of control test, but emphasize different factors than the IRS. Some use an economic reality test that focuses on whether a worker is economically dependent upon a hiring firm.

Many state unemployment compensation agencies use a special statutory test, also called the ABC test. This test focuses on just a few factors:

whether the hiring firm controls the worker on the job
whether the worker is operating an independent business, and
where the work is performed -- that is, where the hiring firm says or where the worker wants to work.

Should companies have freelancers and consultants sign written independent contractor agreements?

Absolutely. Using a written agreement avoids later disputes by providing a written description of the services the IC is to perform, when they are to be performed and how much the IC will be paid.

A written IC agreement can also help establish a worker's IC status. Although an agreement by itself is never enough to make a worker an IC, it will help show the IRS and other agencies that both you and the worker intended to create a hiring firm-IC relationship, not an employer-employee relationship. Newly published IRS training materials state that where all the other factors are evenly balanced, a written IC agreement may tip the scale to the IC side.

But remember, an IC agreement is only useful if it's obeyed. It will be useless if you treat a worker like an employee.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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