The essence of the IRS test is: which party has the right to, or in practice does, control the details of what and how the services are performed? There are three categories of fact-based tests relevant to that determination.
- The first is Behavioral: Does the employer have the right to control whatthe worker does and how the worker does the job? For example, the employee must work the hours and at places specified by the employer. An easy example is the at-home agent who is required by the agency to actively work on sales between 9 and 5 each weekday. An independent contractor working at home makes his own hours and works wherever she chooses, including a table at Starbucks or in clients’ homes.
- The second set of tests are Financial: Which party controls the businessaspects of the worker’s job? How is the worker paid, are expenses reimbursed, who provides tools/supplies? If, for example, the travel-seller worker uses the agency’s offices, including a desk, telephone and computer provided and paid for by the agency, the seller is likely to be treated by the IRS as an employee. If the worker pays a fair-market rent for the use of the agency’s space and equipment, those facts point to the role of independent contractor.
- The third group of tests relates to the Type of Relationship created by the working practices of the parties: Is there a written contract spelling out the relations of the parties, and is the contract followed in practice? The absence of a contract is likely to be fatal to the claim of independent contractor status, but even if there is a contract, you must follow its terms if it is to help you. It is also relevant whether the contract provides for employee-type benefits for the worker (retirement plan, insurance, vacation pay); if so, she is likely an employee. Finally, is the work performed a key aspect of the business? Clearly, selling travel is central to the business of a travel agency. Sales activities must be conducted in a truly independent fashion in order to survive this test.
The IRS guide that discusses the many additional details of these tests is found here.
Read the full story at Clearing The Air: Part I, Independent Contractor or Employee?