In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination.
Here is a link for your reference-
Revenue Ruling 87-41 sets out twenty factors that can be used as a guide to determining if an individual is an employee under common law rules. The twenty factors are never given equal weight. Depending on the business relationship, some are given additional weight and some are given no weight at all.
No single factor among the twenty factors determinative. The factors are meant to provide a full description of the relationship so that a decision can be made as to the degree to which a company has the right to direct and control the worker. Remember, the right to direct and control is the key to the determination of status.
In general, "no" answers to questions 1 to 16 and "yes" answers to questions 17 to 20 indicate an independent contractor. However, a simple majority of "no" answers to questions 1 to 16 and "yes" answers to questions 17 to 20 does not guarantee independent contractor treatment. Some questions are either irrevelant or of less importance because the answers may apply equally to employees and independent contractors. For instance, question 9 asks whether work is performed on the employer's premises. Maintenance of a company's computers must be done company premises because that is where the computers are. The determination of whether the person providing the maintenance is an employee must be done using other factors.
Twenty factors from Revenue Ruling 87-41
Is the worker required to follow company instructions as to when, where, and how he or she is to work? This is a key factor concerning the company's right to direct and control the work.
Does the company provide training? This is an important factor if the worker needs training. Training is a way of directing and controling work. If the worker comes fully trained, or if no training is required, this factor may have no importance.
Are the worker's services closely integrated with the business? For instance, a receptionist is closely integrated with the business, while a janitorial service is not.
Does the worker have to personally render the services, or can the worker subcontract out the work? The worker's ability to hire assistants or subcontract the work is an important indicator of an independent contractor.
Does the company hire, supervise, and pay assistants to the worker?
Is there a continuing relationship between the company and the worker where work is performed at frequently recurring intervals?
Does the company set the work hours?
Must the worker devote substantially full time to the company? This factor is highly dependent on the facts. For instance, an independent contractor may work exclusively for one company on a project lasting a year or more.
Does the worker perform services on the company's premises? This factor is of less importance if the work can only be done on company premises, for example maintenance services
Must the worker perform services in the order or sequence set by the company? This indicate employee status. However, in some situations work must be done in a sequence so that it is coordinated with the efforts of company employees or other contractors.
Must the worker submit oral or written reports to the company? This is an important indicator if the submission of reports is integral to the company's control of the worker. However, many consultants who are independent contractors submit reports to companies with the company having no direct control over the consultants.
Is the worker paid by the hour, week, or month? Payment of a flat fee versus payment by the hour, week or month, is indicative of an independent contractor. However, some professions normally bill by the hour. These in accountants, consultants, lawyers, etc.
Does the company pay the business or traveling expenses of the worker? Many consultants require the client to pay travel and lodging expenses. What is important here is to look at expenses that are not reimbursed. Independent contractor are more likely to have unreimbursed business expenses.
Does the company furnish significant tools, materials and equipment? There is an indication of an independent contractor where a worker that uses his or her own equipment.
Does the company have the right to fire the worker? The right to fire a worker without liability provides an effective means to control a worker, and can indicate an employee relationship. However, in today's companies have far less flexibility in firing a worker than in the past. The inability of a company to fire a worker is not necessarily indicative of an independent contractor.
Can the worker quit without incurring a liability to the company? A worker's ability to quit without liability to the company may indicate an employee relationship. However, certain professionals rendering personal services can usually terminate a relationship without penalty. In addition, a company can conceivably sue an employee for nonperformance.
Does the worker have a significant investment in tools or facilities? A worker with significant investment in tools or facilities is in a position to exercise considerable control over the use of the tools in the performance of the work. This indicates an independent contractor.
Can the worker realize a profit or loss as a result of his or her services? A worker who is incurring substantial expenses in tools, facilities and operating expenses will exercise substantial control over the way in which money is spent. This indicates an independent contractor.
Does the worker provide substantial services to multiple companies at one time? This factor is of less importance than the others. A temporary worker may be employed by different companies every week, and be under the direction and control of each of those companies. Whereas, an independent contractor may work exclusively for one company on a project that lasts a year or more.
Does the worker regularly advertise or make his or her services available to the general public? This is an indicator or an independent contractor. However, the failure to advertise does not indicate an employee. Many consultants never advertise, relying ob word-of-mouth.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.