From JDSupra, David Houston reviews the new guidance on the proper classification of workers as employees or independent contractors in the new Publication 15-A, Employer’s Supplemental Tax Guide. David writes:
IRS Publication 15-A, Employer’s Supplemental Tax Guide (2020) (Dec 23, 2019), https://www.irs.gov/pub/irs-pdf/p15a.pdf (“Pub. 15-A”) announces relevant new or changed standards to be used by the Internal Revenue Service in making these determinations for tax year 2020. Pub. 15-A announces a policy of the IRS to focus on three “areas” of criteria in applying the preexisting “control test.” Significantly, the fundamental “control test” and its prior explication set out by the Service in the so-called “20 Factor” test remain valid.
Pub. 15-A also announced a new reporting form for mandatory employer use in reporting of workers determined to be independent contractors.
For completeness, I note that Pub. 15-A also discusses the threshold determination of “Who Are Employees?” and outlines the four types of business relations between the employer and persons performing services, which are:
- Independent contractor;
- Common-law employee;
- Statutory employee; or,
- Statutory non-employee.
See, Pub. 15-A pages 5-7, including examples of each.
Additional resources and comments are included in the last section below.
1. CONTROL TEST, REDUX
It is of course an understatement to say that there are multiple tests and lists of criteria for characterization of a worker as an employee or independent contractor, developed under the Internal Revenue Code for revenue purposes, under other federal laws for other regulatory purposes, and under state law for purposes arising otherwise. (The scope of Michigan or other state law is beyond this Note).
The thrust of Pub. 15-A appears to bring some additional order or guidance to preexisting criteria, and not to change those criteria or tests.
Under Pub. 15-A, the overarching issue in determining whether a worker is an employee or independent contractor remains the level of authority the employer retains to direct and control the worker’s activities. “In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.” Pub. 15-A p. 7 “Common-Law Rules” section. See generally, Pub. 15-A pp. 7-10.
The 20-Factor Test Remains Valid. The longstanding “20 factor” test to distinguish an independent contractor from an employee, set forth in Rev. Rul. 87-41, remains valid.
“Grouping” of Factors. Effective January 1, 2020, the IRS will “group” factors and focus on three areas of the control test:
- Behavior Control;
- Financial Control; and,
- The type of relationship of the parties.
Pub. 15-A provides:
“Behavior Control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:”
- Exercise of direction over time and place and sequence or means of work;
- Whose instrumentalities (tools or equipment) are used;
- Engagement of other workers;
- Whether specific duties are assigned to a specific worker;
- Instructions that the business gives to the worker;
- Training that the business gives to the worker.
“Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:”
- Who pays unreimbursed business expenses;
- The extent of the worker’s investment in facilities or tools used;
- The extent to which the worker makes the services available to the relevant market;
- How the business pays the worker (salary or wage vs. fee-based);
- The extent to which the worker realizes profit or loss.
“Type of relationship. Facts that show the parties’ type of relationship include:”
- Existence and terms of a written contract;
- Provision of benefits to worker;
- Permanency of relationship;
- Whether the services involved are a regular business activity of the employer.