Learn what the 20-factor test is and how to apply it to classify your workers as either W2 employees or 1099 independent contractors.
The IRS created a “20 Factor” common-law test for employers (and the IRS itself) to evaluate whether a worker should be classified as a W2 employee or a 1099 independent contractor as an alternative to the reasonable basis test. The 20 Factor test is sometimes referred to as the 1099 test or “right-to-control” test and was established in Rev. Rul. 87-41.
20 Factor Test
For each question below, the employer answers yes or no. A high number of “yes” responses indicates that it is likely that the worker should be classified as an employee. A higher number of “no” responses may mean (but not necessarily) that the worker should be classified as an independent contractor.
Is the worker required to comply with the employer’s instructions about when, where, and how to work?
Is training required? Does the worker receive training from or at the direction of the employer, including attending meetings and working with experienced employees?
Are the worker’s services integrated with the activities of the company? Does the success of the employer’s business significantly depend upon the performance of services that the worker provides?
Is the worker required to perform the work personally?
Does the worker have the ability to hire, supervise and pay assistants for the employer?
Does the worker have a continuing relationship with the employer?
Is the worker required to follow set hours of work?
Does the worker work full-time for the employer?
Does the worker perform work on the employer’s premises and use the company’s office equipment?
Does the worker perform work in a sequence set by the employer? Does the worker follow a set schedule?
Does the worker submit regular written or oral reports to the employer?
How does the worker receive payments? Are there payments of regular amounts at set intervals?
Does the worker receive payment for business and travel expenses?
Does the worker rely on the employer for tools and materials?
Has the worker made an investment in the facilities or equipment used to perform services?
Is the payment made to the worker on a fixed basis regardless of profitability or loss?
Does the worker only work for one employer at a time?
Are the services offered to the employer unavailable to the general public?
Can the worker be fired by the employer?
Can the worker quit work at any time without liability?
The 20 Factor test remains valid as a mechanism for employers to classify workers. However, as of January 1, 2020, the IRS now focuses on three groupings of these factors (as defined in Publication 15-A, Employer’s Supplemental Tax Guide) when determining the classification of workers. The three groups are as follows.
Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial Control: Are the business aspects of the worker’s job controlled by the payer? (how paid, reimbursement of expenses, who provides supplies/tools)
Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
Download Liquid’s Freelancer Compliance Risk Checklist to assess your current risk level.
You can also ask the IRS to determine the correct classification for a worker by filing Form SS-8. However, the IRS cautions that it can take at least six months to receive a determination.
Don’t forget to also check state and local regulations for independent contractor classification as these can vary from federal regulations. For example, California Assembly Bill 5 (AB5) uses the three-factor ABC test except in certain circumstances where the Borello test applies. Many states use the A and C factors of the ABC test; Massachusetts, New Jersey, and California require all three. Correctly classifying workers avoid legal issues and tax ramifications.
Need more guidance on classifying workers? Our W2 Employee Versus 1099 Independent Contractor Checklist helps make it easier to navigate the differences between types of workers and classify them correctly. In addition, our Freelancer Compliance Risk Checklist can help you assess your compliance risk level. And using Liquid provides you with access to features that help you with independent contractor compliance and the associated behavioral, financial, and relationship control factors.