Whether your workers are independent contractors or employees is determined by the circumstances surrounding the performance of each worker’s services for you, not by submitting a Form 1099 or Form W-2 to the IRS. Many employers make the mistake of unilaterally and summarily classifying their workers as independent contractors without actually analyzing the necessary factors.
An employer’s legal rights and obligations may change – sometimes dramatically – depending on whether the relationship created is one of independent contract or one of employment. There are certainly benefits to engaging independent contractors rather than employers. Taxes are not deducted from payments made to an independent contractor, you don’t have to carry workers’ compensation insurance on independent contractors, and you are not potentially liable for the actions of your independent contractors. However, as appealing as that relationship may be, the actual determination requires a case-by-case analysis of the circumstances surrounding the worker.
The IRS has established a twenty factor test to use in determining independent contractor status. These factors include:
- Does the individual perform functions that are an essential part of the company’s normal operations, or does the individual operate an independent business?
- Does the company train the individual in the manner and means of performing the work in question?
- Must the individual perform the work personally, or may he or she find others to perform it?
- Does the individual have a permanent working relationship with the company that will continue as long as the work is satisfactory?
- Does the individual do business in the company’s name, with assistance and guidance from other company personnel?
- Is the agreement that contains the terms and conditions under which the individual operates determined by both the company and the individual, or only unilaterally by the company?
- Is the individual paid by the task or by the time spent?
- Does the individual furnish his or her own equipment and materials to perform the work or are they furnished by the company?
- Are particular skills required for the operations being contracted for?
- Does the individual have a proprietary interest in the work, with investment and the opportunity for profit and the risk of loss?
- Does the individual have the opportunity to make decisions that may result in profit or loss?
- Is the individual free to perform the services for others at the same time, or are they to be performed only for the company?
- How much supervision is exercised by the company over the means and manner of the individual’s work?
- What do the actions and words of the company and the individual demonstrate as to their intent to create an independent contractor or an employee relationship?
- What differences or similarities in treatment exist between how the company treats the individual in question and how the company treats its acknowledged employees?
Not every factor can always be considered so courts and governmental agencies will use a balancing test, with emphasis placed on who controls how the work is performed and how the relationship actually works. You should be aware that a written agreement between the parties is only one factor and will not necessarily control the determination.
Let’s take a look at the circumstances surrounding two different jockeys and make the determination as to whether either qualify as an independent contractor.
Jockey 1: Arrangements for rides are made by the jockey or by an agent of the jockey who receives a commission from the jockey. The jockey is free to ride the horses of any stable. The jockey is free to accept or reject a call. The jockey provides his or her own saddle. The trainer instructs the jockey regarding the nature of the mount, the setup of the race, and the trainer's expectations of the running of the race. The jockey is free to disregard the instructions of the trainer, and may decide the route to be taken, the rate of speed of the horse, and similar matters regarding the running of the race. Payment is a fee paid on a per-race basis.
Jockey 2: The jockey rides only for the employing trainer or the jockey rides for other trainers only with the permission of the employing trainer. The jockey is not free to reject the employing trainer's call. The trainer provides or pays for the jockey's saddle. The jockey is not free to disregard the instructions of the trainer regarding the running of the race except for safety reasons. The jockey is paid a salary or wage by the trainer on a time rather than per-race basis; compensation usually includes room and board.
Using the twenty factor test and the information provided in the examples, Jockey 1 is likely to be an independent contractor, while Jockey 2 is likely to be an employee. Jockey 1 demonstrates a clear freedom in deciding whether to provide his services, provides his own equipment, and is paid on a per-race basis, rather than an hourly wage. On the other hand, Jockey 2 has little to no control over whether to take a ride and how to execute the ride, doesn’t provide his own equipment, and is paid on a salary basis. These examples illustrate how important it is to consider the twenty factors and analyze the relationship that actually exists between your business and your workers instead of summarily categorizing them as employees or independent contractors.
In the event the IRS or Department of Labor audits your business and finds that you have been misclassifying employees as independent contractors, you may be liable for a significant amount of back taxes, back wages, and unpaid overtime. If these expenses are not something you have accounted for, your business may be in serious financial trouble.

Subscribe
Recent Posts
- Plunging into Virtual Water with Jenny Kehl [PODCAST]
- DOJ Targets Prescribers of Opioids for Prosecution
- Florida Trustee’s Failure to File Trust Accountings and Tax Returns Results in Trust Freeze
- Darby Turner Named a Public Policy Advocate of the Year
- Anatomy of Municipal Water Rates with Scott Miller [PODCAST]
- IRS Approves Extended Retirement Plan Distributions to a Trust
- Interview with Bailey Roese on the KDP
- Sixth Circuit’s Asylum Ruling Vacates Board of Immigration Appeals Decision Under High Abuse of Discretion Standard
- Event Recap: 2017 BGD Legislative Conference
- Informal Trust Contest Fails and Subsequent Lawsuit Time-Barred
Categories
Contributors
- David A. Adams
- John W. Ames
- Jason T. Ams
- Ali Bartlett Miranda
- Kelly D. Bartley
- Brent R. Baughman
- Kate E. Beatty
- Jeffrey T. Bennett
- Keith A. Bice
- Blaine R. Blood
- Daniel L. Boots
- Melissa Norman Bork
- Claude R. Chip Bowles Jr.
- Andy Bowman
- Richard Boydston
- Brian W. Chellgren, Ph.D.
- Anne A. Chesnut
- Margaret Christensen
- Grantland M. Clapacs
- Briana Clark
- Ross D. Cohen
- Jared A. Cox
- Bruce E. Cryder
- John R. Cummins
- Alan J. Dansker
- Morgan A. Davenport
- D. Rusty Denton
- Brenda K. DeVries
- Ivan M. Diamond
- Rosmond J. Dolen
- Greg J. Duncan
- Mary G. Eaves
- James C. Eaves Jr.
- Philip C. Eschels
- Benjamin J. Evans
- Gregory J. Ewing AICP
- Daniel E. Fisher
- K. Michael Gaerte
- Jeremy P. Gerch
- Carmin D. Grandinetti
- Peter H. Grills
- Andrew Gruber
- J. Mark Grundy
- Alex Gude
- Justin Hage
- Meaghan Klem Haller
- Brad Hasler
- Margaret E. Hayes
- Jeremy Hill
- James M. Hinshaw
- Dwayne Isaacs
- Phil L. Isenbarger
- Eric L. Ison
- Janet P. Jakubowicz
- Christopher W.D. Jones
- William J. Kaiser Jr.
- Larry Kane
- Margaret E. Keane
- Jan Keefer
- J. Richard Kiefer
- June N. King
- Michael Kohlhaas
- Grant Krevda
- R. Clay Larkin
- Charles J. Lavelle
- Scott Leisz
- Benjamin J. Lewis
- Mark A. Loyd
- John S. Lueken
- Peggy B. Lyndrup
- Brad R. Maurer
- John McCauley, CIPP (US)
- Tobin McClamroch
- Michael J. McGee
- David T. McGimpsey
- Kevin P. McGoff
- V. Brandon McGrath
- Jeffrey A. McKenzie
- Holland N. McTyeire V
- Eric J. Metzger
- Brett J. Miller
- Kyle Miller
- Melissa Buckley Minix
- Christie A. Moore
- Roderick Morgan
- Whitney Mosby
- Karl Mulvaney
- Gregory A. Neibarger
- Kimberly J. O'Donnell
- Mark H. Oppenheimer
- Young-Eun Park
- Tandy C. Patrick
- Andrew M. Pendexter
- Julianna M. Plawecki
- Matthew Price
- Nana Quay-Smith
- James Reed
- Kyle T. Resetarits
- Alex S. Rodger
- Bailey Roese
- Rene R. Savarise
- Thomas C. Scherer
- Phillip D. Scott
- Randolph Seger
- Philip Sicuso
- Leslie M. Smith
- Mary E. Solada
- Hans Steck
- Kenji Tashiro
- Jennifer Kahney Thompson
- Peter L. Thurman Jr.
- David O. Tittle
- Matthew Troyer
- Job D. (Darby) Turner
- Tonya Vachirasomboon
- Christopher Van Bever
- D. Bryan Weese
- Brian W. Welch
- Patrick J. Welsh
- Benjamin Weyman
- Shannon L. Williams
- Steven R. Wilson
- April A. Wimberg
- W. Plumer Wiseman Jr.
Archives
- April 2018
- March 2018
- February 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- July 2006
- June 2006
- May 2006
- April 2006
- March 2006
- February 2006
- August 2005
- June 2005