20 Questions for Correctly Classifying a Worker
Often independent consultants are screened using a 20-point checklist established by the IRS as a guideline in determining whether or not a contractor can legally be paid on a 1099 instead of a W-2. Most vendor compliance processes are based on this
Because of co-employment risk (lawsuits and penalties) many corporations are afraid to contract directly with independent consultants unless the worker can show proof that he or she is a legitimate independent business. Independent consultants are often screened screened using a 20-point checklist established by the IRS as a guideline in determining whether or not a contractor can legally be paid on a 1099 instead of a W-2. The checklist is an aid in determining whether the corporation has control, or the “right of control”, over the worker’s job performance. The right to control (not necessarily the actual exercise of the right) determines the status of the worker as an independent contractor or employee.
The 20-point IRS checklist is only a guideline. Compliance with the checklist does not guarantee that a person is correctly classified. There is no one single homogenous definition of the term "employee." Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee or an independent contractor. Ultimately, the decisive factor is whether the corporation had the ability, whether or not exercised, to control the worker’s job performance.
Compliance with the 20-point IRS checklist can increase the likelihood that a worker will be found to be an independent contractor, and for that reason, corporations will often require that an individual satisfy all, or most of, the requirements of the checklist before classifying the worker as an independent contractor. (Compliance and staffing firms usually add additional hurdles to this list, thereby making it even more difficult for independent consultants to qualify for 1099 status. This is because the firms make more money when a worker is paid on a W-2 tax basis through their firm.)
These are the 20 factors from the IRS checklist that the courts will usually review in determining whether a worker is an employee or an independent contractor.
It’s wise for both clients and consultants to be familiar with these 20 factors so they can better structure their contracts and working relationship to minimize any co-employment risk.
Because of co-employment risk (lawsuits and penalties) many corporations are afraid to contract directly with independent consultants unless the worker can show proof that he or she is a legitimate independent business. Independent consultants are often screened screened using a 20-point checklist established by the IRS as a guideline in determining whether or not a contractor can legally be paid on a 1099 instead of a W-2. The checklist is an aid in determining whether the corporation has control, or the “right of control”, over the worker’s job performance. The right to control (not necessarily the actual exercise of the right) determines the status of the worker as an independent contractor or employee.
The 20-point IRS checklist is only a guideline. Compliance with the checklist does not guarantee that a person is correctly classified. There is no one single homogenous definition of the term "employee." Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee or an independent contractor. Ultimately, the decisive factor is whether the corporation had the ability, whether or not exercised, to control the worker’s job performance.
Compliance with the 20-point IRS checklist can increase the likelihood that a worker will be found to be an independent contractor, and for that reason, corporations will often require that an individual satisfy all, or most of, the requirements of the checklist before classifying the worker as an independent contractor. (Compliance and staffing firms usually add additional hurdles to this list, thereby making it even more difficult for independent consultants to qualify for 1099 status. This is because the firms make more money when a worker is paid on a W-2 tax basis through their firm.)
These are the 20 factors from the IRS checklist that the courts will usually review in determining whether a worker is an employee or an independent contractor.
- 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?
It’s wise for both clients and consultants to be familiar with these 20 factors so they can better structure their contracts and working relationship to minimize any co-employment risk.
Back to What is Co-Employment Risk?
