How do you determine if a worker is an employee or an independent contractor?

To determine if a worker is an employee or an independent contractor, one must consider the facts and apply the common-law rules and relevant regulations. The key factor is the degree of control the employer has over the worker. Here are the detailed steps and considerations:

1. Right to Control:
   • The primary consideration is whether the person for whom the services are performed has the right to control and direct the worker, not only as to the result to be accomplished but also as to the details and means by which that result is accomplished. It is sufficient if the employer has the right to control the manner in which the services are performed, even if they do not actually exercise that control.
2. Common-Law Rules:
   • The common-law rules are used to determine the status of a worker. These rules are outlined in sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1 of the Employment Tax Regulations. These sections state that an employer-employee relationship exists when the employer has the right to control and direct the worker.
3. Twenty Factors Test:
   • The IRS has identified twenty factors that indicate whether sufficient control is present to establish an employer-employee relationship. These factors include:
     1. Instructions: Requirement to comply with instructions about when, where, and how to work.
     2. Training: Training provided by the employer.
     3. Integration: Integration of the worker's services into the business operations.
     4. Services Rendered Personally: Requirement to render services personally.
     5. Hiring, Supervising, and Paying Assistants: Control over hiring, supervising, and paying assistants.
     6. Continuing Relationship: Existence of a continuing relationship.
     7. Set Hours of Work: Establishment of set hours of work.
     8. Full-Time Required: Requirement to work full-time.
     9. Doing Work on Employer's Premises: Performing work on the employer's premises.
     10. Order or Sequence Set: Requirement to perform services in a set order or sequence.
     11. Oral or Written Reports: Requirement to submit regular reports.
     12. Payment by Hour, Week, Month: Payment by the hour, week, or month.
     13. Payment of Business and/or Traveling Expenses: Payment of business and/or traveling expenses by the employer.
     14. Furnishing of Tools and Materials: Provision of tools and materials by the employer.
     15. Significant Investment: Worker’s investment in facilities used to perform services.
     16. Realization of Profit or Loss: Ability to realize a profit or suffer a loss.
     17. Working for More Than One Firm at a Time: Performing services for multiple firms.
     18. Making Service Available to General Public: Making services available to the general public.
     19. Right to Discharge: Employer’s right to discharge the worker.
     20. Right to Terminate: Worker’s right to terminate the relationship without liability.
4. Additional Considerations:
   • The right to discharge the worker is a significant factor indicating an employer-employee relationship.
   • Furnishing of equipment and a place to work by the employer.
   • Continuity of the relationship and whether the services are an integral part of the employer’s business.
   • The designation or description of the relationship by the parties is immaterial if the facts indicate an employer-employee relationship.
5. Specific Examples:
   • In cases where the worker performs services primarily on the employer’s premises, is furnished all necessary equipment, and is subject to the employer’s instructions, the worker is likely an employee.
   • Conversely, if the worker holds themselves out to the public, furnishes their own tools, and has the ability to realize a profit or suffer a loss, they are likely an independent contractor.

By carefully analyzing these factors and the degree of control exercised by the employer, one can determine whether a worker is an employee or an independent contractor for federal employment tax purposes.

Sources:
LTR 8721108
Publication 15-A (2024)
LTR 8843012
Rev. Rul. 87-41
LTR 8701021
LTR 8715019
LTR 8701012