The IRS created a 20-point checklist that a business owner can use to determine if the new hire is an employee or a contractor. Just because one says he’s an employee or one says she’s a contractor doesn’t make the determination. The whole list has to be considered.
Please also note that if you want the new hire to be a contractor, this list can help the business owner decide how to structure the relationship. Keep in mind, if you want the new hire to be a contractor, then you are giving up an element of control that an employer has over an employee.
Following are the 20-points that have been established:
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his services at any time?
John,
Great article this is really helpful for the general small business owner. Many people hire a “contractor” thinking they will save money on payroll taxes. In the end it typically cost them more. Most people that think they have contractors actually have employees but they don’t want to admit it.
If a business answers yes to any of the above questions is the contractor then technically considered an employee? What are the guidelines?
The IRS looks at all 20 questions as a whole. Just because one question indicates they may be an employee doesn’t disqualify them from actually being a contractor. Unfortunately, the 20 questions represent the guidelines. I could be wrong, but I don’t think the IRS has some sort of internal formula that says if 4 questions say they are an employee than they have to be an employee.