How the IRS determines if workers are common-law employees

The IRS uses three major factors as evidence to prove a worker’s employment status. These factors are:

• Behavioral: Does your company have the right to control a worker’s actions and how they perform their job?
• Financial: Which business aspects of the worker’s job are controlled by you, the payer? These aspects can include who provides equipment and tools, reimbursement for worker expenses and how the worker is paid.
• Type of relationship: Does the worker receive certain employee benefits from your business, such as health insurance, sick leave, vacation pay or retirement contributions? Is the worker’s job intended to continue indefinitely, or are they a contingent worker who’s hired for a specific project or period of time?

Employment situations are often unique and complex, so these factors may or may not apply to your worker. The IRS doesn’t require a person to meet all three criteria for you to consider them a common-law employee. What matters most is your overall relationship with a worker and your right to control the work they perform.

If you aren’t sure how to classify a worker, you can file Form SS-8 with the IRS. The IRS will review the facts you’ve provided and officially determine the worker’s employment status.

More factors to consider

In general, workers may be classified as common-law employees if some or all of the following factors apply:

• The worker is paid by the hour, week or month.
• You set the worker’s schedule, including the hours and days they must work, or you require them to work full-time.
• You restrict the person from doing work for others.
• You train the worker and require them to follow your instructions.
• You pay for the worker’s equipment or travel expenses and give them a place to work.
• The worker can’t hire, supervise or pay assistants unless they’re employed as a manager, foreman or supervisor.
• You have the right to fire the worker.

A worker can usually be classified as a self-employed independent contractor if they:

• Have their own workspace and pay for their own tools and equipment
• Are allowed to work for multiple businesses or clients
• Can hire and fire their own workers
• Make profits or suffer losses
• Perform jobs for prices agreed upon in advance
• Advertise their services to the general public

The ABC test

Certain states use the ABC Test to determine whether a person is a common-law employee or independent contractor. This is a stricter test that uses three factors to determine a person’s employment status. A worker can be classified as an independent contractor if all three of these factors apply:

1. The worker is free from an employer’s control or direction in how their work is performed.

A worker who buys their own equipment and sets their own schedule may be considered free of an employer’s control.

2. The work takes place off-site or outside the usual course of business.

This requirement can be met if you hire an outside plumber, electrician or other person to perform a temporary job. A person can’t be an independent contractor if you require them to perform work that’s similar to your business even if you allow them to set their own schedule or work from home.

3. The worker is engaged in an independent business, profession or trade.

For this to apply, an employer needs to prove that the independent business was in existence at the time work was performed. Licensure, incorporation and advertisements can serve as proof of a business’s independence.

This requirement isn’t necessarily met if the person’s work relies on a single employer or if you require the worker to enter into a contract that designates them as an independent contractor.

Common law employee FAQs

What is a common-law employee versus an independent contractor?

Employers must withhold and pay for Medicare and Social Security taxes as well as unemployment insurance on wages that are paid to a common-law employee. You generally don’t need to withhold or pay these taxes for workers classified as independent contractors. Employees are often granted benefits that contractors aren’t, such as health insurance and retirement plans. If you have employees, you’ll also need to obtain workers’ compensation insurance, which may not be necessary if you only employ independent contractors.

Does the IRS still use the 20-factor test?

The 20-factor test is also called the “right-to-control test” because it evaluates who controls how a person’s work is performed. The IRS doesn’t use this test in an official capacity anymore, but aspects of it are still used to determine whether a worker is considered an independent contractor or employee.

Which states use the ABC test?

The following states use some version of the ABC test: California, Connecticut, Delaware, Illinois, Indiana, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Vermont, Washington and West Virginia.