Rev. Rul. 82-20: Determining Worker Status

Classifying a worker as an employee or an independent contractor is significant for federal tax purposes. The distinction impacts withholding for income, Social Security, and Medicare taxes, as well as unemployment tax obligations. The Internal Revenue Service (IRS) uses common law rules, which are principles from court rulings, to evaluate the relationship between a worker and a business.

This framework examines the degree of control and independence in the working relationship. The determination rests on the facts and circumstances of each arrangement, focusing on who has the right to direct and control the work.

The Three Categories of Control

The IRS has organized the evidence of control and independence into three categories to guide the determination of a worker’s status. No single factor is decisive; instead, the IRS weighs the evidence across all three categories to determine the outcome.

Behavioral Control

Behavioral control examines whether the business has the right to direct and control how the worker performs their tasks. This category focuses on whether the business retains the right to control the work, not whether it actually exercises that right. Evidence of behavioral control includes the type and degree of instructions the business provides, such as requiring work to be done in a specific manner or at a certain time.

The provision of training on the business’s specific methods also indicates control over how the work is accomplished. Evaluation systems that measure the details of how work is performed, rather than just the final result, also point toward employee status. A worker hired for their expertise and who is free to determine the methods used to complete a project is more likely an independent contractor.

Financial Control

Financial control focuses on the business’s right to direct or control the financial aspects of the worker’s job. One consideration is the worker’s investment in the equipment and facilities used. Independent contractors often have a significant investment in their own tools, while employees rely on the employer to provide necessary resources. Independent contractors are also more likely to incur unreimbursed business expenses.

The method of payment can be an indicator. Employees are often paid a regular wage for a specific time period, such as an hourly or weekly rate. Independent contractors are more commonly paid a flat fee for a project. The opportunity for the worker to realize a profit or incur a loss points toward independent contractor status, as it suggests control over their own business decisions.

Relationship of the Parties

This category considers how the worker and the business perceive their relationship. Written contracts describing the intended relationship are considered, though the substance of the relationship will always override the contract’s label. The provision of employee-type benefits, such as health insurance, pension plans, or paid leave, is a strong indicator of an employer-employee relationship.

The permanency of the relationship is another factor. An expectation that the relationship will continue indefinitely suggests employment, whereas a relationship for a specific project is more characteristic of an independent contractor. If a worker’s services are integral to the core function of the business, it is more likely they will be found to be an employee.

Consequences of Worker Misclassification

Misclassifying an employee as an independent contractor leads to significant financial liabilities. The employer is responsible for withholding income taxes and the employee’s share of Social Security and Medicare (FICA) taxes from wages. If they fail to do so, the business can be held liable for these amounts.

The employer is also responsible for its own share of FICA taxes and for paying Federal Unemployment Tax Act (FUTA) taxes. Misclassification means these taxes go unpaid, and the IRS can seek to recover them from the employer. This liability can include penalties for failure to file returns, such as Form 941, and for failure to deposit the required taxes.

Section 530 of the Revenue Act of 1978 offers a potential “safe harbor” for businesses, which can relieve an employer of employment tax liability from misclassification if certain conditions are met. To qualify, the business must have had a reasonable basis for not treating the worker as an employee. The business must have also consistently treated the worker as an independent contractor and filed all required federal tax returns, such as Form 1099-NEC, consistent with that treatment.

Requesting a Status Determination with Form SS-8

Either a worker or a business can ask the IRS to make an official determination of a worker’s status by filing Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The form is structured to collect facts related to the three categories of control. You will need basic identifying information for both the firm and the worker, including names, addresses, and taxpayer identification numbers.

The latest version of Form SS-8 can be downloaded from the IRS website. Once completed, the form must be mailed to the IRS address specified in the instructions, as it cannot be filed electronically. There is no fee for requesting a determination, but the form must have an original, handwritten, or acceptable electronic signature.

After the IRS receives the form, it will contact the other party to give them an opportunity to provide their own information. The case is then assigned to a technician who reviews the facts, applies the relevant laws, and makes a determination. The process often takes at least six months, and the IRS may contact either party for additional clarification. The final result is a formal determination letter sent to both parties explaining the decision.