How IRS determines employee or independent contractor status.

To determine whether a worker is an independent contractor or an employee, IRS examines the relationship between the worker and the business, and considers all evidence of control and independence. The facts that provide this evidence fall into the following three categories:

(1) Behavioral control covers facts that show whether the business has a right to direct and control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, etc. And employees are often trained to perform services in a particular manner.

(2) Financial control covers facts that show whether the business has a right to control the financial and business aspects of the worker's job.This includes the extent to which the worker has unreimbursed business expenses; the extent of his investment in the facilities being used; the extent to which he makes his services available to the relevant market; how he is paid; and the extent to which he can realize a profit or incur a loss. For example, independent contractors are more likely to have unreimbursed expenses, be available to work for others in the relevant market, and make a profit or loss.

(3) Type of relationship includes written contracts describing the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which services performed by the worker are a key aspect of the company's regular business. For example, an employee's relationship is more likely to be permanent and an employee is more likely to provide services that are a key aspect of the business.

Taxpayers who would like IRS to determine employee status can file Form SS-8, which reflects the factors noted above.

IRS's three-category approach essentially distills the 20-factor test IRS had used to determine whether a worker was an employee or an independent contractor. FTC ¶ H-4259 ; Tax Desk ¶ 535,009