APPENDIX D INDEPENDENT CONTRACTOR TEST INTERNAL REVENUE SERVICE IRS Independent Contractor Test The IRS formerly used what has become known as the "Twenty Factor" test. Under pressure from Congress and from representatives of labor and business, it has recently attempted to simplify and refine the test, consolidating the twenty factors into eleven main tests, and organizing them into three main groups: behavioral control, financial control, and the type of relationship of the parties. Those factors appear below, along with comments regarding each one (source: IRS Publication 15-A, 2021 Edition; available for downloading from https://www.irs.gov/publications/p15a#en_US_2021_publink1000169490 (PDF). Another good IRS resource for understanding the independent contractor tests is at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Behavioral control Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right. Financial control Facts that show whether the business has a right to control the business aspects of the worker's job include:
Type of relationship Facts that show the parties' type of relationship include:
Former IRS Twenty-Factor Test The previous twenty-factor test used by the IRS can be seen in the test (see Appendix E of this article) officially adopted by the Texas Workforce Commission, the agency which enforces the state unemployment tax in Texas. That test may be found on the Internet at https://twc.texas.gov/files/businesses/form-c-8-employment-status-comparative-approach-twc.pdf (PDF). Employers may also request a copy in printed form by asking for Form C-8 from "Texas Workforce Commission, Tax Department, 101 E. 15th Street, Austin, Texas, 78778". There is a "safe harbor" rule in Section 530(a) of the Revenue Act of 1978 that sometimes allows companies to classify workers in close cases as independent contractors, even if they might be considered employees under the IRS eleven-factor test shown here, as long as such a classification is consistent with the industry practice for such workers, or a previous IRS audit has found that such workers are not employees, or an IRS ruling or opinion letter supports the classification in question, and the worker has been treated all along as an independent contractor. The important thing to remember is that TWC takes the position that the agency is not bound by the IRS safe harbor rule or by any particular ruling that IRS makes under the federal law, reasoning that TWC must follow its own specific Texas statute, Section 201.041 of the Texas Unemployment Compensation Act, which provides the "direction and control" test explained at the beginning of this article. Do not underestimate the difficulty of applying these standards to specific individuals performing services. In doubtful cases, always consult a knowledgeable labor and employment law attorney. Return to Businesses & Employers |