HR:Determination checklist
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In the United States, the Internal Revenue Service considers 20 factors in determining a worker's status as an employee or an independent contractor. Most state tax and employment agencies use the same 20 factors, sometimes with additional considerations. We have developed this checklist based on the 20 factors considered by the IRS and several other factors commonly used by other agencies. Using this checklist may help you determine whether a position is more likely to be viewed as an employee or an independent contractor position.
Contents |
Disclaimer
This checklist is for informational purposes only and is not guaranteed to be accurate. The tax and employment laws it is based on apply to the USA in general, and may or may not be applicable in your jurisdiction. As with all financial and legal matters, you should discuss any questions you have with a qualified accounting professional and/or attorney. Ultimately, the IRS guidelines are just that -- guidelines. Ultimately, it is the decision of a human auditor considering all the facts of the particular situation in light of his or her experiences and these guidelines that will determine a worker's status for the IRS; likewise for other agencies.
Instructions
For sections 1 and 2, add the point values listed at the end of each question for which you answer "Yes", and subtract the point values for each question you answer "No". Note that subtracting a negative number is equivalent to adding its positive [example: (+1)-(-2) = (+1)+(+2) = (+3) not (-1)]. The combined scores from sections 1 and 2 will help to indicate how likely a worker will be considered an employee (a negative number indicates an employee-employer relationship) or a contractor (a positive number indicates an independent contractor relationship). The closer the result is to zero, the more difficult the determination is to make.
Section 3 uses a different point scale, and you add the point values for each question to which you can answer "Yes". To effectively make a case for an independent contractor status, the target result is 1.0 or greater. For an employee-employer relationship, the target number is zero. Values less than 1.0 may be very difficult to prove to the IRS. If the Section 1 and 2 results are inconclusive or weak, a strong Section 3 score may sway the determination.
Again, these are only guidelines and are in no way guaranteed to apply to all situations—especially yours. It should, however, give you some ideas about areas where your case may be weak and could be strengthened. Remember that the biggest single factor is the amount of control an employer exerts over the worker. Other key issues are how dependent the employer or the worker are on each other, both in terms of productivity and finances. Good luck!
Section 1. Top 20 IRS Considerations.
To receive the most accurate results, please try to answer only Yes or No. If an answer varies depending upon the situation, try to answer the question as it generally pertains to the position, not to the exceptions. If a particular consideration is completely irrelevant to your situation, you may mark N/A for "Not Applicable". If you have no idea how to answer a question, mark the Unkn option for "Unknown".
| # | Yes | No | N/A | Unkn | Consideration | Value |
|---|---|---|---|---|---|---|
| 1 | Instructions. Does the hiring firm have the right to give the individual providing service instructions about when, where and how to work? | -2 | ||||
| 2 | Training. Does the hiring firm train the individual providing service to do the job in a particular way? | -2 | ||||
| 3 | Integration. Is the work provided by the individual a regular part of the business of the firm, or have the individual's services become so important to the firm that they have become a part of the regular trade or function of the firm? | -2 | ||||
| 4 | Services Rendered Personally. Must the individual provide the services personally as opposed to delegating tasks to someone else? | -2 | ||||
| 5 | Hiring Assistants. Does the firm hire, fire, supervise, and/or pay the individual's assistants, if any? | -2 | ||||
| 6 | Work Hours. Does the firm set the individual's working hours? | -2 | ||||
| 7 | Full-Time Work. During paid work time, must the individual exclusively perform firm-related work? | -2 | ||||
| 8 | Work Done On-Premises. Must the individual work on the firm's premises, or does the firm control the route or location where the work must be performed? On-site repairs or maintenance, such as plumbing work to fix a leaky pipe or computer repairs where the equipment is located, do not necessarily indicate control over the employee in performing the work. This is especially true if the individual has to make accommodations in the workspace to effect the repairs, and then return the workspace to its earlier condition after the repairs are completed. | -2 | ||||
| 9 | Sequence. Does the firm have the right to determine the order or sequence in which services are performed? | -2 | ||||
| 10 | Reports. Must the individual give the firm periodic reports accounting for their actions prior to completion of the project? Irregular updates as longer projects progress through pre-designated milestones do not necessarily indicate control over the employee in performing the work, but rather are necessary auditing and project management procedures. The difference is largely whether the reports are work/event driven based on the individual's progress, or if they act as a form of control so the firm can monitor the individual's performance. | -2 | ||||
| 11 | Payments. Is the individual paid by the hour, week or month? Independent contractors are generally paid by the job or on commission, although by industry practice, some are paid by the hour. | -2 | ||||
| 12 | Expenses. Does the firm pay the individual's business or travel costs? | -2 | ||||
| 13 | Tools & Materials. Does the individual provide their own equipment, tools or materials? If tools or materials are provided by the firm, does the individual pay fair market value for using the tools or materials? | +2 | ||||
| 14 | Investment. Does the individual have an investment in the equipment and facilities used to do the work? If equipment or facilities are provided by the firm, does the individual pay fair market value rental for it? | +2 | ||||
| 15 | Profit or Loss. Can the individual providing service make a profit or suffer a loss as a result of the work, aside from the money earned from the project? This should involve real economic risk—not just the risk of not getting paid. | +2 | ||||
| 16 | Continuing Relationship. Is there an ongoing relationship between the individual and the firm? A relationship can be considered ongoing if services are performed frequently, but irregularly. | -2 | ||||
| 17 | Works for More than One Firm. Does the individual providing service provide similar services to more than one company at a time? | +2 | ||||
| 18 | Services Offered to the General Public. Does the individual providing service offer similar services to the general public? | +2 | ||||
| 19 | Right to Fire. Can the firm fire the individual? An independent contractor cannot be fired without subjecting the firm to the risk of breach of contract lawsuit. | -2 | ||||
| 20 | Right to Quit. Can the individual quit at any time, without incurring liability? An independent contractor has a legal obligation to complete the contract. | -2 | ||||
| Total | ← Add the values in the Yes and No columns. Subtract the No total from the Yes total. A negative number indicates an employee-employer relationship. A positive number indicates an independent contractor relationship. The closer to zero and the more unknowns, the more difficult the determination could be. |
Section 2. Additional Considerations.
The following considerations further define the relationship between the two parties, as well as meet other jurisdictional requirements.
| # | Yes | No | N/A | Unkn | Consideration | Value |
|---|---|---|---|---|---|---|
| 21 | Benefits. Does the firm pay the individual benefits received by other firm employees? (Independent contractors may receive the value equivalent to a benefit, but not benefits.) | -1 | ||||
| 22 | Required Meetings. Does the firm require the attendance of the individual at regular meetings with other firm employees? | -1 | ||||
| 23 | Listings. Does the firm list the individual in directories, marketing materials, and other items distributed to the general public in the same manner as other employees of the firm? | -1 | ||||
| 24 | Employer I.D. Number. Does the individual hold or has the individual applied for a federal (and state of local, if applicable) employer identification number? | +1 | ||||
| 25 | Taxes. Has the individual filed business or self-employment income tax returns with the IRS based on such services in the previous year? | +1 | ||||
| 26 | Separate Business. Does the individual maintain a separate business with their own office, equipment, material, and other facilities? | +1 | ||||
| 27 | Contracts. Does the individual operate under contracts to perform specific services for specific amounts of money and under which the individual controls the means of performing the services? | +1 | ||||
| 28 | Completion of Work. Is the individual responsible for the satisfactory completion of services contracted to perform and is liable for failure to complete the service? | +1 | ||||
| 29 | Compensation. Does the Individual receive compensation for service performed under a contract and not on any other basis? | +1 | ||||
| 30 | Profit or Loss Realization. Will the individual realize the profit or suffers a loss under contracts to perform service? | +1 | ||||
| 31 | Business Liabilities. Does the individual have continuing or recurring business liabilities or obligations? | +1 | ||||
| 32 | Economics. Does the success or failure of the individual's business depend on the relationship of business receipts to expenditures? | +1 | ||||
| 33 | Freedom from Control. Has the individual been and will the individual continue to be free from the firm's control or direction over the performance of the individual performing the services both under their contract and in fact? | +1 | ||||
| 34 | Customary Trade. Does the individual perform these services in an independently established trade, business or profession in which the individual is customarily engaged? | +1 | ||||
| 35 | Certifications and Training. Does the individual maintain certifications or advanced training not provided by, nor paid for by, the firm? | +1 | ||||
| Total | ← Add the values in the Yes and No columns. Subtract the No total from the Yes total. A negative number indicates an employee-employer relationship. A positive number indicates an independent contractor relationship. The closer to zero and the more unknowns, the more difficult the determination could be. |
Section 3. Supporting Evidence.
As evidence of the individual maintaining a separate and independent business, the individual should meet at least four of the following requirements (ranked roughly in order from more convincing to less convincing):
| # | Yes | Consideration | Value |
|---|---|---|---|
| 36 | Guarantees. The individual assumes financial responsibility for defective workmanship or services not provided by purchasing performance bonds, warranties, errors and omissions or liability insurance relating to the service provided. | +0.30 | |
| 37 | Self-Employment Tax. Individual has filed business or self-employment income tax returns with the IRS based on these types of services in the previous year. | +0.30 | |
| 38 | Licenses. Individual maintains a business license and, if appropriate, a resale or seller's certificate. | +0.30 | |
| 39 | Offices. Individual maintains a business office, storefront, warehouse, or other business location that is registered with the local city or county. | +0.25 | |
| 40 | Directory Listings. Individual pays to list services in the Yellow Pages or a business directory of general circulation. | +0.25 | |
| 41 | Telephone Listings. There is a telephone listing and service for the business separate from the individual. | +0.25 | |
| 42 | Affiliations. The individual is registered as a business member of a chamber of commerce, trade association, and/or other business organization separate from the firm. | +0.25 | |
| 43 | Advertising. Individual runs commercial advertisements in the newspaper, on television, on radio, and/or on the Internet. | +0.25 | |
| 44 | Multiple Firms. Services are performed for two or more different firms within a one-year period. | +0.20 | |
| 45 | Contracts. Services are performed only pursuant to written contracts. | +0.20 | |
| 46 | Promotional Material. Business cards, brochures, or other printed business materials are available. | +0.20 | |
| 47 | Custom Forms. The individual's business uses custom printed invoices, statements, accounting forms, etc. | +0.20 | |
| Total | ← Add the values in the Yes column. The larger the result value, the easier it will be to prove the individual is a contractor. Values less than 1.0 make it very difficult to prove contractor status to the IRS. If the Section 1 and 2 results are inconclusive or weak, a strong Section 3 score may sway the determination. |
Find out More
The issue of "employee" vs. "independent contractor" can be a tricky one. We have some additional information that may help assist you with this topic.
