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IRS 20-Point Checklist for Independent Contractors: A Comprehensive Guide

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IRS 20-Point Checklist for Independent Contractors: A Comprehensive Guide

Companies often work with different kinds of employees—some are hired as permanent employees, while others are onboarded for specific projects or contracts. What marks the difference? There are several things to consider when you categorize employees, from compensation funds to unemployment insurance and paid leaves to protection against deductions. 

Misclassification of workers is among the most common mistakes. You would be surprised to know that estimates show approximately 10% - 30% of businesses misclassify at least one of their employees as independent contractors. What can go wrong with only two alternatives, right? Well, many things. Misclassification of employees implies companies treating them as independent contractors or vice versa— continues in the modern workplace. 

But by using the IRS 20-point checklist for independent contractors, you can prevent misclassification and ensure compliance with employment laws. Please read the article to learn the importance of classification and how the IRS independent contractor checklist is your ultimate solution.

Who is an Independent Contractor?

An individual who offers services to another person or company under contract is called an independent contractor. They have specialized skills and knowledge to perform the task and conclude the project.

They are not classified as employees and do not receive any employee benefits from the hiring agency. Further, they receive their income on a project basis and pay taxes themselves.

Also Read: Are Independent Contractors Self-Employed

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Employee or Independent Contractor: Avoiding Misclassification

Misclassification happens when you incorrectly categorize the workers as independent contractors or employees. The rise of independent contractors has made it challenging to identify the worker status as more people take on side hustles. However, correct classification is essential to avoid legal penalties and expensive fines.

Some tips to prevent worker misclassification include.

1. Understand the Governing Laws

Learning what laws and regulations govern employee classification in your country or region is necessary. One such example is the Fair Labor Standards Act (FLSA). It controls and sets penalties for employee misclassification in the U.S.

2. Learn How to Identify Contractors

You must know how to categorize workers once you are familiar with the laws. You can use the independent contractor vs. employee checklist or other tests to ask the right questions and identify the correct answers.

3. Train Your HR Team

Your HR team hires and recruits the talent. They must know how to differentiate between a contractor and an employee. Ensure your members are updated and have a process to deal with misclassification.

4. Use an Employer of Record

An EOR can help you ensure your compliance with all employment practices. Besides simplifying payments, payroll taxes, onboarding, and other HR functions, it makes your firm compliant and prevents misclassification of employees.

The IRS 20-point Checklist for Independent Contractors

So how does the independent contractor checklist help you classify a worker? The Internal Revenue Service (IRS) provides several parameters to identify whether the workers are employees or independent contractors. Each factor evaluates the right to control and the accuracy of independent contractor classification.

Here are the parameters to consider when referring to the IRS independent contractor vs. employee checklist to know the employee work status.

1. Actual Direction or Instruction of the Worker

Must the individual follow instructions from your management staff regarding when, where, and how to work? If the company directs the aspects of how to perform the task, it is a possible employment relationship. Meanwhile, independent contractors hold significant control over their work and are not subject to the same level of direction.

2. Training

Does the individual receive training from your company? Workers undergoing or joining training programs facilitated by the company are considered employees. The training may direct the method to do the task. Independent contractors typically do not undergo company-provided training. They are expected to have the necessary expertise already.

3. Integration of Services

Is the service or continuation of your business dependent on the type of service the individual provides? The tasks performed by employees significantly impact the business and contribute to long-term objectives. It is not the same for services provided by independent contractors. Their services are supplemental in nature.

4. Personal Nature of Services

Does the individual personally perform the contracted services? Companies insisting on a specific person to perform the work have an extent of control over work. It allows them to direct methods and indicates the worker is an employee. An independent contractor is typically free to assign work to anyone.

5. Similar Workers

Do you hire, supervise, or pay individuals to assist the worker in completing the project? A worker qualifies as an employee if the company pays for their assistant or hires managers for supervision. An independent contractor has control over hiring, supervising, and paying helpers.

6. Continuing Relationship

Is the relationship between your company and the individual continuous or long-term? An employee has a continuous relationship with the company. Meanwhile, an independent contractor has a contract with companies for sequential projects.

7. Work Hours

Are there any fixed numbers of hours of work? Employers establish fixed work hours for employees. Independent contractors may or may not have set hours. They work according to their schedule to finish the project within the timeline.

8. Full-time Work

Is the individual required to work full-time for you? Employee status demands workers to devote substantially full time to the business. In contrast, independent contractors can choose the person they want to work for and their working hours.

9. Work on the Premises

Is the work performed on company premises? Employers typically require employees to work on the company premises. When companies demand someone to carry out the project in the provided workplace, even if it can be performed elsewhere, it signifies an employment relationship. Independent contractors usually have the flexibility to choose where they work and are not bound to the company's premises for their tasks.

10. Performance Order

Is the individual required to follow a set sequence or routine in the work performance? Employees follow the order or sequence the employer sets to perform a service. They cannot choose their work pattern and style. Meanwhile, independent contractors work according to their processes to deliver results.

11. Submitting Reports

Must the individual give you reports regarding their work? An employment relationship requires a worker to provide regular written or oral reports regarding the project status. Independent contractors do not have the same reporting obligations. They often have more autonomy and are not as closely monitored in this regard.

12. Payment Method

Do you pay the individual by the hour, week, or month? Employees get wages or payments regularly. It could be hourly, weekly, or monthly pay schedules..

13. Payment of Expenses

Do you reimburse the individual for business and travel expenses? Independent contractors bear the expenses related to their work and often set high fees to cover them. But an employee typically receives direct reimbursement from the company for travel or business costs.

14. Tools and Materials

Do you supply the individual with needed tools or materials? Workers who complete the task using tools, equipment, and materials their company furnishes are employees. An independent contractor obtains supplies to finish a project.

15. Investment

Have you made investments in facilities used by the individual to perform services? Employees use the workspace employers provide them for working. Independent contractors, however, invest in and maintain their facilities to do their tasks.

16. Work Exclusivity

Does the individual only offer services to your company? An independent contractor controls their services and can work for multiple firms. Hence, working for several people indicates the employee is an independent contractor.

17. Profit or Loss

Is the worker free from realizing a profit or suffering a loss based on their work? An employee receives predetermined remuneration even when the business suffers. Therefore, a worker who realizes profit or loss on the rendered service is typically an independent contractor.

18. Availability to the Public

Does the individual limit the availability of their services to the general public? An employee works for your company and performs tasks keeping in mind the business objectives. An independent contractor can regularly and consistently make their service available to the public, not just one organization.

19. Right of Discharge

Do you have the right to discharge the individual? You can fire or ask your employee to resign without incurring liability. However, you can not remove an independent contractor if they produce results up to their contract specifications.

20. Right to Quit

Can the individual you hire terminate their services at any time? The right to leave the employment at any time without any penalty indicates an employer-employee relationship. An independent contractor, however, must finish the contract to avoid unwanted liabilities.

How do you conclude the work status now that you have gotten to the last of the independent contractor vs. employee checklist? Easy; if your answer to the first sixteen questions is 'no' and 'yes' for the remaining four, you are working with an independent contractor.

However, it is essential to note that most negative answers to the first sixteen questions do not mean an independent contractor treatment. It is so because all factors do not apply to every situation and may be the same for an employee and independent contractor.

A worker does not have to meet the 20 criteria to identify as an employee or independent contractor. Further, no single element is decisive in determining the status. The independent contractor checklist answers can be different depending on the individual circumstances.

The Difference Between the IRS 20-Factor Test and Other Tests

Multiple tests are there to decipher the work status of a worker. However, each follows a different and unique approach to help determine the worker's status. 

1. Criteria Complexity

IRS 20-Factor Test

The IRS 20-point checklist for independent contractors employs the Common Law Rules to look at multiple aspects across three categories:

  • Your behavior toward the worker,
  • The financial arrangement you set with the worker,
  • The nature of the working relationship.

The ABC Test

The ABC or A&C test classifies workers as independent contractors only when they meet the three stipulated criteria:

  • The hiring entity holds no control over the worker regarding work performance.
  • The worker undertakes the task outside the course of the hiring entity.
  • The worker has a self-established trade or business of the same nature.

Economic Realities Test

The Economic Realities Test includes five factors and evaluates the worker status on a case-by-case basis:

  • The nature of work and degree of control,
  • Opportunity for profit and loss,
  • The permanence of the working relationship,
  • The level of integration of performed work.

2. Legal Jurisdiction

IRS 20-Factor Test

The Internal Revenue Service (IRS) considers a worker an employee by default unless proven otherwise. You can file a Form SS-8 or Determination of Employee Work Status For Purposes Income Tax Withholding and Federal Employment Tax obligations to the IRS unit. 

Economic Realities Test

It tests the employer-employee relationship under the FLSA.

3. Purpose of Test

IRS 20-Factor Test

IRS 20-Factor Test assesses how much control and independence workers have in their work relationship with a hiring company.

The ABC Test

The ABC test provides three parameters to help employers classify workers as independent contractors.

Economic Realities Test

The Economic Realities Test aims to evaluate the extent of the worker's economic dependence on the hiring company.

Hire Compliantly With Skuad

Finding and hiring talent in international markets requires due diligence to sidestep misclassification risks. Working with an experienced EOR partner to gain insight into locally compliant employment contracts is always a good option to expand your global reach. 

With Skuad's Employer of Record (EOR) platform, hiring independent contractors and employees in more than 160 countries is easy. We can help you hire, onboard, and pay talent across borders, compliantly. Book a demo today to start your global employment journey, compliantly.

FAQs

Q1. How do I protect myself when hiring an independent Contractor?

Verifying and validating licenses, bonding, and insurance is the first step when hiring an independent contractor. Always ask for their credentials and double-check them before you sign the agreement.

Q2. Can I write off expenses if I get a 1099?

Yes, self-employed individuals can write off their business expenses. It includes 1099 employees, freelancers, and gig workers. The checklist for 1099 employees allows them to deduct all ordinary and necessary business expenses.

Q3. Do independent contractors use their own equipment?

Independent contractors usually buy and leverage their tools and equipment to accomplish the work. They are also responsible for the associated expenses, including repairs, maintenance, and insurance.

Q4. What is the difference between self-employed and independent contractors?

Independent contractors offer specialized services on a contractual basis. Meanwhile, the self-employed earn money without operating within an employee-employer relationship.

About the author

Catalina Wang is a Human Resource Consultant. She manages recruitment, onboarding, and contract administration staffing for many organizations and remote teams. She’s passionate about efficient HR management and the impact of tech on hiring practices.

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