Employee vs. Independent Contractor: 20 Questions to Help You Figure It Out

Properly classifying workers as employees or independent contractors has always been a recurring tax issue for many business owners, but it’s likely even more important in our current environment. With a tight labor market forcing many businesses to use independent contractors to address staffing needs, and the emergence of the “gig” economy, in which workers are not always interested in long-term employee/employer relationships, the need to correctly classify employees is paramount.

If you’re a business using independent contractors, particularly ones not under a business-to-business contract, you need to ensure they truly are independent contractors in the eyes of the IRS. If not, you risk fines, penalties and interest if the IRS audits your business.

How to Determine if Your Worker is an Independent Contractor

The following top 20 questions are what the IRS uses to determine if a worker is an independent contractor or employee.

While no single test, nor even the combination of a majority of tests, will necessarily be determinative, a “yes” answer to any one of the questions (except #16) may mean one of your workers is an employee and should be treated as such for tax purposes.

1. Is the worker required to comply with instructions about when, where and how the work is done?
2. Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
3. Are the services provided by the worker an integral part of the business' operations?
4. Must the worker render the services personally?
5. Does the business hire, supervise, or pay assistants to help the worker on the job?
6. Is there a continuing relationship between the worker and the person for whom the services are performed?
7. Does the recipient of the services set the work schedule?
8. Is the worker required to devote his/her full time to the person he/she performs services for?
9. Is the work performed at the place of business of the company or at specific places set by the company?
10. Does the recipient of the services direct the sequence in which the work must be done?
11. Are regular oral or written reports required to be submitted by the worker?
12. Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job?)
13. Are business and/or traveling expenses reimbursed?
14. Does the company furnish tools and materials used by the worker?
15. Has the worker failed to invest in equipment or facilities used to provide the services?
16. Does the arrangement put the person in a position of realizing either a profit or loss on the work?
17. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
18. Does the worker in fact make his/her services regularly available to the general public?
19. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
20. Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?

Contact Phil Baptiste at pbaptiste@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.