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If your company employs independent contractors or workers from staffing agencies you will need to make sure they are correctly identified as common law employees based on IRS definition. You will need to have the correct number of employees and add them to the Affordable Care Act calculation in order not to incur a hefty excise tax.
Employee Classification, Taxes, IRS
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20 Factor Analysis For Employee Classification

20 Factor Analysis For Employee Classification

20 Factor Analysis For Employee Classification

Employee Classification

If your company employs independent contractors or workers from staffing agencies you will need to make sure they are correctly identified as common law employees based on IRS definition. You will need to have the correct number of employees and add them to the Affordable Care Act calculation in order not to incur a hefty excise tax.

The IRS’s Revenue Ruling 87-41 lists 20 factors that should be used in identifying common law employees. This list was developed by the IRS based on court cases in which individuals have been faced with the question of whether they are common law employees.

The 20-factor Analysis

  • Behavioral control— whether the business has a right to direct or control how the worker performs specific tasks for which he or she is engaged, including instructions and training.
      • Instructions — The worker is required to comply with other people’s instructions about when, where and how to work (indicates an employee).
      • Set hours of work — The company establishes set hours of work for the worker (indicates an employee).
      • Doing work on the employer’s premises — The work is performed on the company’s premises, especially if the work could be done elsewhere. For example, the company has the right to compel the worker to travel a designated route, canvass a territory within a certain time or work at specific places (indicates an employee).
      • Training — An experienced employee is required to work with the worker by corresponding with him or her, requiring him or her to attend meetings or using other methods (indicates an employee).
      • Hiring, supervising and paying assistants — The company, rather than the worker, hires, supervises and pays the worker’s assistants (indicates an employee).
      • Order of sequence set — The worker must perform services in the order or sequence set by the company (indicates an employee).
      • Furnishing of tools and materials — The company furnishes significant tools, materials and other equipment (indicates an employee).
      • Integration — The success or continuation of the business depends to an appreciable degree upon the performance of the worker’s services (indicates an employee).
      • Services rendered personally — The worker’s services must be rendered personally (indicates an employee).
      • Full time required — The worker must devote substantially full time to the work (indicates an employee).
      • Oral or written reports — The worker must submit regular or written reports to the company (indicates an employee).

Additional factors noted in the Internal Revenue Manual:

  • The company controls what tools or equipment to use (indicates an employee).
  • The company controls what work must be performed by a specified individual (indicates an employee).
  • The company controls what workers to hire or to assist with the work (indicates an employee).
  • The company controls where to purchase supplies and services (indicates an employee).

Financial control — whether the business has a right to direct and control the financial and business aspects of the worker’s activities, including the extent to which the worker has a significant investment or unreimbursed business expenses, or may realize a profit or loss, and the extent to which the worker makes his or her services available to the market.

      • Payment of business and/or traveling expenses — The company ordinarily pays the worker’s business and/or traveling expenses (indicates an employee).
      • Payment by hour, week or month — Payment to the worker is made by the hour, week or month (unless this method of payment is not just a convenient way of paying a lump sum) (indicates an employee). Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
      • Significant investment — The company, rather than the worker, invests in facilities that are used by the worker in performing services (indicates an employee).
      • Realization of profit or loss — The worker cannot realize a profit or suffer a loss as a result of the worker’s services (over and above the profit or loss ordinarily realized by employees) (indicates an employee). If the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor.
      • Working for more than one firm at a time — The worker performs more than de minimis services for a multitude of unrelated people or firms at the same time (indicates an independent contractor).
      • Making services available to the general public — The worker makes his or her services available to the general public on a regular and consistent basis (indicates an independent contractor).

Additional factors noted in the Internal Revenue Manual:

  • The worker gets paid whether the work is done or not (indicates an employee).
  • The worker gets paid only if the worker finishes the job (indicates an independent contractor).
  • There are unreimbursed expenses that the worker has to bear himself/herself (indicates an independent contractor).
  • The worker has a significant investment in assets or tools (indicates an independent contractor).
  • The worker can make business decisions that affect his or her bottom line (indicates an independent contractor).
  • Relationship of the parties— how the parties perceive their relationship (for example, the intent of the parties in establishing the relationship and written contracts, and the permanence of the relationship).
      • Continuing relationship — There is a continuing relationship, including work performed at frequently recurring intervals, even if the intervals are irregular (indicates an employee).
      • Right to discharge — The company has the right to discharge the worker (indicates an employee). In contrast, an independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
      • Right to terminate — The worker has the right to end his or her relationship with the company at any time he or she wishes without incurring liability (indicates an employee).

Additional factors noted in the Internal Revenue Manual:

  • If there is a contract between the parties, how is it worded?
  • The relationship is only for a specific project or period (indicates an independent contractor).
  • The worker receives benefits from the company (for example, vacation and sick pay, pension plan, health or life insurance) The worker has his or her own business, which he/she markets to others (indicates an independent contractor).