Independent Contractor vs. Employee: The IRS 20 Common Law Factors

Edition: September 1999 - Vol 7 Number 09
Article#: 469
Author: Repertoire

The Internal Revenue Service devised the table below several years ago to help clarify the distinction between employees and independent contractors.

1. Instructions

Employee: Complies with instructions about when, where and how work is to be performed

Independent Contractor: Works his or her own schedule. Does the job his or her own way.

2. Training

Employee:Trained by an experienced employee working with him or her. Required to take correspondence courses. Required attendance at meetings and by other methods indicates that the employer wants the services performed in a particular manner.

Independent Contractor: Uses his or her own methods and receives no training from the purchaser.

3. Integration

Employee:Services of the individuals are merged into the business. Success and continuation of the business depends upon these services. Employer coordinates work with that of other workers.

Independent Contractor: Success and continuation of business aren't dependent on his or her services.

4. Services Rendered Personally

Employee:Services must be rendered personally. Not able to engage other people to do the work.

Independent Contractor: Contractor able to assign one of his or her men to do the job.

5. Hiring, Supervising and Paying Assistance

Employee:Hires, supervises and pays workers at the direction of the employer (acts as foreman or representative of the employer).

Independent Contractor: Hires, supervises and pays the other workers as a result of a contract under which he or she agreed to provide materials and labor and is responsible for the results.

6. Continuing Relationship

Employee:The individual continues to work for the same person year after year.

Independent Contractor: Hired to do one job. No continuous relationship.

7. Set Hours of Work

Employee:The hours and days are set by the employer.

Independent Contractor: Is master of his or her own time.

8. Full Time Required

Employee:Must devote full time to the business of the employer. Restricts him or her from doing other gainful work.

Independent Contractor: Free to work when and for whom he or she chooses.

9. Doing Work on Employer's Premises

Employee:Implies that the employer has control, is physically within the employer's direction and supervision.

Independent Contractor: Works off employer's premises, uses own office, desk, telephone.

10. Order or Sequence Set

Employee:Performs services in the order or sequence set by the employer.

Independent Contractor: Services performed at his or her own pace.

Employee:Salesperson reports to the office at specified times, follows up on leads and performs certain tasks at certain times.

Independent Contractor: Salesperson works own schedule and usually has own office.

11. Oral or Written Reports

Employee:Required to submit regular oral or written reports to the employer.

Independent Contractor: Submits no reports.

12. Payment by Hour, Week, Month

Employee:Paid by the employer of regular amounts at stated intervals.

Independent Contractor: Paid by the job on a straight commission.

13. Payment of Business and/or Traveling Expenses

Employee:The employer pays the person's business and/or traveling expenses.

Independent Contractor:Takes care of own expenses; is accountable only to him/herself for expenses.

14. Furnishing of Tools, Material

Employee:Employer furnishes tools, materials, etc.

Independent Contractor: Furnishes his or her own tools.

15. Significant Investment

Employee:Has a lack of investment and depends on the employer for such facilities.

Independent Contractor: Has a real, essential and adequate investment.

16. Realization of Profit or Loss

Employee:Cannot realize a profit or loss by making good or bad decisions.

Independent Contractor: Can realize a profit or suffer a loss as a result of his or her services.

17. Working for More Than One Firm at a Time

Employee:Usually works for one employer.

Independent Contractor: Works for a number of persons or firms at the same time.

18. Making Service Available to General Public

Employee:Does not make his or her services available except through some company or business he or she does not have an interest in.

Independent Contractor: Has own office and assistants. Holds business license, listed in business directories or maintains business telephone. Advertises in newspapers, etc.

19. Right to Discharge

Employee:Can be discharged at any time.

Independent Contractor: Cannot be fired so long as he or she meets contract specifications.

20. Right to Terminate

Employee:Can end his or her relationship with employer at any time.

Independent Contractor: Agrees to complete a specific job. Is responsible for its satisfactory completion or is legally obligated to make good.