IRS 3 Part Test

01.02.19 Classifying Independent Contractors Correctly

IRS 3-Part Test:

When considering withholding income, Social Security and Medicare taxes, and paying unemployment tax on wages paid, you the business owner must be determining whether a worker is an independent contractor or an employee.  The IRS will look to and consider all information that provides evidence of the degree of control and independence of the worker.  Facts that provide evidence of the degree of freedom and control fall into these three categories: Behavioral, Financial, and Type of Relationship.

Common Law Rules:

According to the IRS facts that provide evidence of the degree of control and independence fall into three categories:

1.  Behavioral: Does the business control or have the right to control what the worker does and how the worker does his or her job?

2.  Financial: Are the business aspects of the worker’s job controlled by the business (these include things like how a worker is to be compensated, whether to reimburse the worker for expenses, who provides tools/supplies, etc.)?

3.  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 vital aspect of the business?

Colorado has a similar – but more detailed – standard for classifying a worker as an independent contractor or employee.  As with the IRS’s inquiry, the ultimate question is how much control does the business assert over the worker.  The higher the degree of control, the more likely the worker will be determined to be an employee and not an independent contractor. 

If you are an employer who has workers classified as independent contractors, you need to review those individuals very carefully to determine if they are classified correctly.  Under all Federal and State labor and tax laws there is no uniform definition of “employee” or “independent contractor” therefore, proper classification can be challenging.  Be diligent and adequately classify your workers using knowledgeable, trustworthy counsel to avoid unnecessary liability. 

For more information on classifying independent contractors be sure to check out our other articles:

Business Owners Beware

Colorado Employment Law

5 Tips for Proper Classification

If you are unsure or have any questions regarding the proper classification of an independent contractor, please don’t hesitate to ask us at MB Law:



* This information is for general purposes only and is not intended to constitute any specific legal advice of any type.