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The 50 Factors determining Independent Contractor status
The "50 Factors" are a superset of the criteria called the 'Common Law Factors' (or 20 Questions) that are used by IRS and state employment departments to determine which workers are legitimate independent contractors ("ICs") and which are employees.
Elucidating comments have been supplied by the author (unknown) in red. The following items are more important in determining IC status than others: 4, 20, 26, 35, 41, and 42.
- Control of Means infers an employee status
The RIGHT to control is what matters, not the actual exercise of that right.
- Control of Ends has no impact either way
Example: A planned building's blueprints, plans, and specifications are very detailed yet they are ends, not means.
Observation: The ends will always be controlled for both ICs and employees.
- Suggestions do not infer employee status
ORDERS do infer employee status.
- Right to Terminate or Fire at Will infers employee status
Right to terminate for cause does not infer employee status.
If right to terminate without cause is viewed as necessary, provide in agreement for prior written notice of termination. Thirty (30) days or more prior written notice is recommended.
- Distinct Trade, Occupation, Profession, or Business for worker infers IC status
Worker should have pre-printed letterhead and invoices.
Worker should have business cards (with business email address and/or web URL) on which the worker's business name or employer name appears.
- Services held out to General Public (ie, appropriate industry) infers IC status
Worker should have a listing in the business pages of the phone book and should advertise (eg, in the Yellow Pages, local papers, trade publications, related organizations, etc.)
Hint: Take advantage of the free web-based business listing services offered by many of the internet directories and search engine providers.
- Worker has appropriate/necessary Licenses, Permits, Certificates, etc, if wants to be classified as an IC
There are many kinds and many issuers; none are considered 'better' than others.
IC should obtain and pay fee without reimbursement.
Example: Rancher hires construction contractor to build room addition for ranch home. Contractor injured on job and files workers' compensation claim. Insurance carrier for rancher fought claim asserting IC status, thus worker had no coverage. Held: Workers' compensation claim must be paid. California law requires a contractor's license and makes unlicensed contractors statutory employees for workers' compensation purposes. Contractor was unlicensed and therefore held to be an employee of rancher.
- Doing Business as a Corporation infers, but does not prove, IC status
In California, an annual, nonrefundable $800 deposit against income taxes is due from companies incorporated and/or doing business in the state.
One-person S or C corporations in which that person does substantially all the work themselves are automatically classified as Personal Services Corporations and must pay federal taxes at a flat rate of 35 percent on all earnings.
While California holds incorporation to be proof of IC status, IRS has reclassified the employment status (from IC to employee) of small corporations it held to have incorporated solely for the purpose of evading IC determination rules.
- Fictitious or Assumed Business Name ("dba") infers IC status
Example: Willie Worker dba ABC Enterprises.
A bank account in the name of the FBN / ABN / DBA is required, and business expenses should be paid from it.
- Use of FEIN (Federal Employer Identication Number) by worker infers IC status
This costs less than $25, and establishes that you are a separate business filing a discreet Schedule C.
Treasury (IRS) Form SS-4 used to apply for an FEIN, but are only allocated to companies having (or expecting to have) employees.
Basics: FEINs are available for all types of businesses. Requesting taxpayer need not be incorporated. Sole proprietorships and partnerships can and often do get FEINs in order to properly report and pay payroll taxes on their employees.
- Work done under Worker's name infers IC status
Work performed under firm name infers employee status.
For technical writers, a byline in the document you've contributed to helps establish IC status.
- Free Training for worker infers employee status
Unless you reimburse the client for the cost of the training and don't charge for your time while being trained.
This includes orientation programs.
Education on products that you normally would not be expected to use does not constitute evidence that you're an employee, but if your client sends you to FrameMaker training, you're definitely tempting fate....
- Detailed Work Instructions or Procedures infer employee status
Control of ends such as building blueprints, plans, and specifications, does not infer employee status.
Client's micromanagement of a contractor makes that contractor look like an employee to IRS/EDD.
- HIGH SKlLL activities infer IC status
In terms of the nature of occupation: Higher Skill: Doctor, lawyer, accountant, engineer, architect, psychologist, licensed nurse, etc. Lower Skill: Telemarketer, domestic services, etc.
- ROUTINE OR SCHEDULE ESTABLISHED BY FIRM infers employee status
If the company defines your hours, you're their employee.
If you don't have to be onsite when you don't have meetings, you look more like an IC.
If you have meetings every day for extended periods (more than 2-3 weeks), you look like an employee.
- REGULAR REPORTING by worker infers employee status
Especially when you have to specify how many hours you've worked and when. If the client insists, offer to show them your own records, but do not submit a timesheet. And if you absolutely must submit a timesheet, do so in the name of your business.
- INVOICES from worker infer IC status
Best Facts for IC: Worker has preprinted invoices bearing IC's business name, address, and FEIN/TIN.
- SERVICES MUST BE PERFORMED PERSONALLY infers employee status
Right of worker to assign or delegate (ie, subcontract) infers IC status.
Example: Willie Worker is given a job to repair ten widgets. Under the agreement, Willie is free to do the job himself, or to assign it to his employees or to other qualified ICs. If Willie opts to subcontract the work, he looks even more like an IC relative to his client if he specifies to his subcontractor only the deliverable and the deadline, but doesn't constrain hours, location, or other factors.
- HIRING OF HELP by worker infers IC
Hired by firm or worker? (Hired by firm infers employee status)
Paid by firm or worker (Paid by company infers employee status)
FICA and income tax withheld? (Company withholds infers employee status)
If so, who reports: worker or firm? Company reports infers employee status)
- TOOLS AND OTHER INSTRUMENTALITIES supplied by worker infers IC status
Supplied by employer infers employee status
Is equipment leased or rented? It makes a difference how much money you have at stake; the higher the value of the equipment, the better your case for qualifying as an IC.
Example: If you use your client's phone, PC, and/or copier, you're their employee
- WORK CLOTHES PROVIDED by firm infers employee status
- SIGNIFICANT INVESTMENT in business by worker infers IC status
Investment of labor has little or no weight
- ABILITY TO LIST AND/OR TO SELL ENTERPRISE infers IC status
Example: Willie Worker could list his widget repair business as being for sale through a business broker
- WORKER HELD OUT AS AN EMPLOYEE to clients of firm infers employee status
Make it clear to those outside your client's firm that you are a contractor.
Example: if you have client-supplied voicemail, clearly state on your announcement that you are an independent contractor: ("You've reached Jane Doe, on contract to XYZ Corporation. Please leave a message.")
- AD BY WORKER resulting in job infers IC status
Ad by firm in business opportunities section of newspaper.
Ad by firm in help wanted section of newspaper.
- OFFICE AWAY FROM HOME is strong evidence of IC status
Could be rented space at firm's location, or an exchange of spare bedrooms!
Office at worker's home does not present best case for IC.
- LENGTHY JOB OR CONTINUOUS RELATIONSHIP infers employee status
It's better to have short contracts that can be renewed than one long contract.
A contract that extends indefinitely makes it hard to appear an IC.
Having the same clients year after year doesn't help your case for qualifying as an IC.
- PAYMENT BY UNIT OF TIME infers employee status
If you bill by the actual unit of time you've worked (hour, week, month, year), you look like an employee; it's worse still if you furnish a time record to the firm for which you're working.
If you bill by the job (commission, "project bids," piecework, lump sum payment) or by the unit of production (eg, per page or per chapter), you look more like an IC.
If your efficiency is up to you, and you can benefit from completing a job fast, you improve your case as an IC.
Purchase orders stating a non-to-exceed amount are helpful when arguing for IC status.
If you mess up part of a job and have to redo it, do not charge the client for the additional time if you want to be considered an IC.
- BONUSES infer employee status
- INSURANCE bought by worker infers IC status
Your personal medical insurance doesn't count; you're assumed to supply your own.
You build your case for qualifying as an IC if you buy your own workers' compensation, liability, and/or Malpractice/Errors and Omissions insurance - and are not reimbursed for the premiums.
- DEDUCTIONS from compensation infer employee status
FICA tax deducted (OK if statutory employee).
FITW tax deducted.
Workers' compensation premium distinguished.
Example: Trucking company, at driver's request, deducted certain percentage from each payment to driver. The withheld money was given to driver at the end of the year. On IRS audit, trucking company reasoned that this arrangement was merely an accommodation to the driver because driver was not financially responsible and could not manage to save to pay driver's taxes. IRS took position that driver was an employee and, as proof, pointed to fact that sums withheld looked like employee FICA and FITW.
- GUARANTEED MINIMUM COMPENSATION infers employee status
Example: If you work on a retainer basis (say, a minimum of 1000 hours per year) and you have legal recourse for getting the money, you look like an employee receiving a regular salary.
If, on the other hand, you offer a firm your promise that you will respond to its need within a certain number of days or weeks of learning of their requirement, and they buy your commitment with a retainer, you're an IC.
Observation: This practice appears to be widespread tor many healthcare firms that treat doctors, dentists, therapists, counselors, psychiatrists, psychologists, etc., as ICs.
- BOND obtained by firm to cover worker infers employee status
Reason: Bond language often refers to employment (employer-employee) relationship as condition of coverage.
- CUSTOM that given work is performed by ICs infers IC status
- LONG HOURS ("full time work") infers employee statue
Even after-hours work makes it look like you're an employee.
- DRAWING ACCOUNTS OR ADVANCES provided to worker infer employee status
Beware employment agencies that pay an IC before they are paid by their clients. Often, these payments are advances and can be reclaimed by the agency and/or, worse, cause you to lose your IC status.
- FRINGE BENEFITS provided to worker infer employee status
Medical benefits
Pension
Paid vacations
Sick pay
- ANTI-COMPETITION clauses infer excess control and therefore employee status
- SECRECY CLAUSES are neutral, do not infer or interfere with IC status
- PAYER NOT IN BUSINESS, IC status is inferred
Example: Homeowner hires gardener. Non-employee status is inferred for the gardener.
Example: Husband and wife hire two carpenters to do work on their home. Carpenters held to be ICs.
- ONE SOURCE OF INCOME from the relevant activity infers employee status
Only one source
More than one
Percent of time for firm
Percent of time for others
Firm has priority
Example: Willie Worker gets one Form W-2 for his daytime job as a widget repairer for firm "A". Willie also moonlights as a widget repairer for firm "B" and gets one Form 1099 for that work. Here, Willie has only ONE source of income from his purported independent widget repair work. A state or federal employment tax auditor may well contend, all other things being equal, that Willie should have received two Form W-2s, one from firm "A" and one from firm "B".
- SIGNIFICANT RISK OF LOSS infers IC status
Worker can or cannot lose money? Potential loss infers IC status.
What expenses incurred by worker? Significatn expenses incurred infers IC status.
What expenses reimbursed by firm to worker. If major expenses reimbursed, infers employee status.
- REGULAR BUSINESS OF EMPLOYER, employee status is inferred
Same activity v. different activity
Sometimes referred to as "integration" of worker's services into the business enterprise of the payer/firm.
Example: Plumber hires plumber. Employee status inferred.
Example: Plumber hires tree-cutting service. IC status inferred.
- FREE SALES LEADS infer employee status
- FIXED PRICES infer employee salesperson status
Example: Used car salesperson
- MANDATORY SALES MEETINGS infer employee status
- DIRECT COLLECTION by worker of fee from customer or client infers IC status
100 percent remitted to firm? Same as collection by firm, and infers employee status.
Strategy: Switch from payer to payee.
Examples: Certain taxi cab companies, certain nurses' registries, certain barber shops or beauty salons, table top dancers.
- IRS Form 1099-MISC given to worker infers IC status
- INS Form I-9, Employment Eligibility Verification Form, from worker infers employee status
Employment status test used by INS: Common law test.
- BELIEF OF PARTIES that IC relationship exists infers IC status
Written IC Agreement.
Substance over form rule.
Example: A writer was held to be an employee although the main part of the agreement referred to the writer as an IC. The reason: contract language incorporated by reference referred to writers as employees.
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