IRS Guidance

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee.  These relevant facts fall into three main categories:

  • Behavioral Control.  A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
  • Financial Control.  A worker might be an independent contractor if:
    • They have a significant investment in their work
    • They are not reimbursed for business expenses
    • They  can realize a profit or loss
  • Relationship of the Parties.   Employee benefits and written contracts can illustrate how the business and the worker perceive their relationship

For a more detailed explanation of these points see IRS Publication 1779.

The ABC Test

The ABC Test states that service for remuneration is employment, unless:
(a) the worker is free from control or direction in the performance of his/her service;
(b) the service is outside the usual course of business and outside the usual place of business;
(c) and the worker is customarily engaged in an independently established trade, occupation, profession, or business.

The Common Law Test

Under the Common Law Test an employer/employee relationship exists when the worker is subject to the employer’s will and control, not only as to what needs to be done, but how it should be done. The most important question to ask is, did the employer have sufficient control, or right to control, the work being done to establish an employee/employer relationship. See twenty common law factors to make that determination.