Updated 5/1/17

The following information was prepared from IRS training materials prepared in 1996. That material qualifies that it is not to be used or cited as authority or setting or sustaining a technical position.

See also the original 20 factors.

See IRS Publication 15-A, or excert on this site 7/9/08

The IRS has divided the 20 factors into 3 primary categories of evidence:

  1. Behavioral control
  2. Financial control
  3. Relationship of the parties

The IRS has also focused on this as 2 factors, “control” (behavioral and financial) and “relationship”.

Behavioral Control – focuses on whether there is a right to direct or control how the work is done

Independent contractors are rarely totally unconstrained in the performance of their contracts, while employees almost always have some degree of autonomy.

Facts which illustrate whether there is a right to direct or control how the worker performs the specific task for which the worker is engaged:

Instructions – the degree to which instructions apply to how the job gets done rather than to the end result

Types of instructions

  • when to do the work
  • where to do the work
  • what tools or equipment to use
  • what workers to hire to assist with the work
  • where to purchase supplies or services
  • what work must be performed by a specified individual (including ability to hire assistants)
  • what routines or patterns must be used
  • what order or sequence to follow

Requirement of prior approval before taking an action is a type of instruction

Rules mandated by government agencies or industry governing bodies

A business requirement that its workers comply with rules established by a 3rd party (e.g., municipal building codes related to construction) should be given little weight in determining the worker’s status, but more stringent guidelines than or in addition to those imposed by a 3rd party should be given more weight in determining if the business has retained the right to control the worker.

Customer instructions

Instructions and standards originated with the customer and passed on by the business to the worker may be adopted by the business and should not be ignored.

Suggestions vs. instructions

A non-mandatory suggestion does not constitute the right to direct and control.

Business identification

With increasing concerns about safety, many businesses provide customers with some reassurance about the identification of those people gaining access to their homes or workplaces. The fact that a worker is required to wear a business uniform or other identification, or is required to place the business’s name on the worker’s vehicle, does not necessarily indicate that the worker is an employee of the business. If the nature of the worker’s occupation is such that the worker must be identified with the business for security purposes, wearing a uniform or placing the business’s name on a vehicle is a neutral fact in analyzing whether an employment relationship exists.

Nature of occupation for instructions

In analyzing the status of professional workers, evidence of control or autonomy with respect to the financial details of how the task is performed tends to be especially important, as does evidence concerning the relationship of the parties.

Nature of work for instructions

The absence of need to control should not be confused with the absence of right to control. An employment relationship may also exist when the work can be done with a minimal amount of direction and control, such as work done by a stockperson, store clerk, or gas station attendant.

Evaluation systems

Businesses use evaluation systems to monitor the quality of work performed by both independent contractors and employees. If an evaluation system measures compliance with performance standards concerning the details of how the work is to be performed, the system and its enforcement are evidence of control over the worker’s behavior. The lack of a formal evaluation system is a neutral fact.


Periodic or on-going training provided by a business about procedures to be followed and methods to be used indicates that the business wants the services performed in a particular manner. The following types of training should be disregarded:

  • orientation or information sessions about the business’s policies, new product line, or applicable statutes or government regulations
  • programs that are voluntary and are attended by a worker without compensation

Financial Control – focuses on whether there is a right to direct or control how the business aspects of the worker’s activities are conducted

Facts which illustrate whether there is a right to direct or control how the business aspects of the worker’s activities are conducted:

  • significant investment
  • unreimbursed expenses
  • services available to the relevant market
  • method of payment
  • opportunity for profit or loss

Economic dependence

The question of whether the worker is economically dependent on or independent of the business for which services are performed has been rejected by Congress and the Supreme Court as a basis for determining worker classification. Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).

Significant investment

A significant investment is evidence that an independent contractor relationship may exist, but is not necessary for independent contractor status. Some types of work do not require large expenditures. Even if large expenditures are required (such as costly equipment), an independent contractor may rent the equipment needed at fair rental value. If the worker pays fair market or fair rental value, the worker’s relationship to the seller or lessor is irrelevant. The size of the worker’s investment and the risk borne by the worker are not diminished merely because the seller or lessor receives the benefit of the worker’s services. The investment must have substance, e.g., significant investment is not established if the worker rents equipment which the worker can turn in at any time without liability for future payments.

Business expenses

The extent to which a worker chooses to incur expenses and bear their costs impacts the worker’s opportunity for profit or loss. These expenses may include:

  • rent and utilities
  • tools and equipment
  • training
  • advertising
  • payments to business managers and agents
  • wages or salaries of assistants
  • licensing/certification/professional dues
  • insurance
  • postage and delivery
  • repairs and maintenance
  • supplies
  • travel
  • leasing of equipment
  • depreciation
  • inventory/cost of goods sold

Reimbursed expenses

Businesses often pay business or travel expenses for both their employees and independent contractors. Independent contractors are more likely to have unreimbursed expenses, and the opportunity for profit and loss is thus increased. Fixed ongoing costs incurred regardless of whether work is currently being performed are especially important. Relatively minor expenses incurred by a worker, or more significant expenses that are customarily borne by an employee in a particular line of business, such as an auto mechanic’s tools, would generally not indicate an independent contractor relationship.

Services available

While not always necessary, independent contractors often advertise, maintain a visible business location, and are available to work for the relevant market. An independent contractor with special skills may be contacted by word of mouth without the need for advertising. An independent contractor who has negotiated a long-term contract may find advertising equally unnecessary and may be unavailable to work for others for the duration of the contract. Independent contractors may find that a visible business location does not generate sufficient business to justify the expense. The absence of these activities is a neutral fact.

Method of payment

A worker who is compensated on an hourly, daily, weekly, or similar basis is guaranteed a return for labor, and this is generally evidence of an employer-employee relationship, even when the wage or salary is accompanied by a commission.

Performance of a task for a flat fee is generally evidence of an independent contractor relationship, especially if the worker incurs the expenses of performing the services. Whether payments are made daily, weekly, or monthly is not relevant.

A commission-based worker may be either an independent contractor or employee.

Realization of profit and loss – probably the strongest evidence

If the worker is making decisions which affect the worker’s bottom line, the worker likely has the ability to realize profit or loss.

Relationship of the Parties – focuses on how the parties perceive their relationship and their intent

Facts which illustrate how the parties perceive their relationship:

  • intent of parties/written contracts
  • employee benefits
  • discharge/termination
  • regular business activity


Provided corporate formalities are properly followed and at least 1 non-tax business purpose exists, the corporate form is generally recognized for both state law and federal law, including federal tax, purposes. Disregarding the corporate entity is generally an extraordinary remedy, applied by most courts only in cases of clear abuse. The worker will usually not be treated as an employee of the business, but as an employee of the corporation.

Employee benefits are benefits traditionally associated with employee status

That a worker is excluded from a benefit plan because the worker is not considered an employee by the business is relevant (though not conclusive) in determining the worker’s status as an independent contractor. If the worker is excluded on some other grounds (e.g., the worker’s work location or business unit), the exclusion is irrelevant in determining whether the worker is an independent contractor or an employee.

State law characterization

Characterizations based on these laws or determinations should be disregarded because the laws or regulations involved may use different definitions of employee or be interpreted to achieve particular policy objectives.

Discharge / Termination

The significance of facts bearing on the right to discharge/terminate is so often unclear and depends primarily on contract and labor law, so this type of evidence should be used with great caution.

Under a traditional analysis, a business’s ability to terminate the work relationship at will, without penalty, provided a highly effective method to control the details of how work was performed and, therefore, tended to indicate employee status. Conversely, in the traditional independent contractor relationship, the business could terminate the relationship only if the worker failed to provide the intended product or service, thus indicating the parties’ intent that the business not have the right to control how the work was performed.

Limits on ability to discharge

Businesses may lack complete flexibility in discharging an employee. The business may be liable for pay in lieu of notice, severance pay, “golden parachutes,” or other forms of compensation when it discharges an employee. The reasons for which a business can terminate an employee may be limited by law, by contract, or by its own practices. Inability to freely discharge a worker, by itself, no longer constitutes persuasive evidence that the worker is an independent contractor.

Limit’s on worker’s ability to quit

A worker’s ability to terminate work at will was traditionally considered to illustrate that the worker merely provided labor and tended to indicate an employer-employee relationship. If the worker terminated work and the business could refuse payment or sue for nonperformance, this indicated the business’s interest in receipt of the product or service for which the parties had contracted and tended to indicate an independent contractor relationship.

Termination of contracts

Independent contractors may enter into short-term contracts for which nonperformance remedies are inappropriate or may negotiate limits on their liability for nonperformance.

Non-performance by employee

Businesses may successfully sue employees for substantial damages resulting from their failure to perform the services for which they were engaged.

Permanency has been considered by Courts as relevant evidence in determining whether there is an employer-employee relationship.

Indefinite relationship is generally considered evidence of their intent to create an employment relationship.

A long term relationship may exist between a business and either an independent contractor or an employee

A temporary relationship is a neutral fact

Regular business activity

The extent to which the services performed by the worker and are a key aspect of the regular business of the company. The mere fact that a service is desirable, necessary, or even essential to a business does not mean that the service provider is an employee.

Facts of lessor importance

Part-time or full-time work

With cutbacks and downsizing in business and industry, many companies hire workers on a part-time basis. These workers may be either independent contractors or employees.

Place of work

The importance of this factor has decreased with tele-commuting, etc. Off-site work is consistent with either an independent contractor or employer-employee relationship. Sometimes, services can be provided at only one location. Modern technology, such as cellular phones, modems, and computer networks, has greatly expanded the scope of the workplace. Allowing work offsite can be attractive to businesses due to lowering costs, improving morale, and helping to retain valued workers.

Hours of work

Some work by its nature must be performed at a specific time. Modern communications have increased the ease of performing work outside normal business hours, while flexibility in setting hours may improve morale and retain valued workers. In today’s world, flexible hours are consistent with either independent contractor or employee status.