What to Know About the IRS Common Law Employee Test

Decoding the IRS Common Law Employee Test: Navigating its Impact on Employers and Workers

The IRS Common Law Employee Test is a crucial criterion used by the Internal Revenue Service (IRS) to determine whether an individual is considered an employee for tax purposes. This classification holds significant implications for both employers and workers, influencing tax obligations, benefits eligibility, and legal responsibilities. In this comprehensive guide, we will delve into the details of the IRS Common Law Employee Test, exploring the factors that contribute to this classification and providing valuable insights for employers and workers alike. Check with the IRS for any changes to current laws.

Understanding the IRS Common Law Employee Test

At its core, the IRS Common Law Employee Test is designed to distinguish between individuals who are considered employees and those who are classified as independent contractors or self-employed. The classification is crucial for tax purposes, affecting the way income is reported, taxes are withheld, and benefits are administered.

Factors Considered

The IRS examines various factors to determine whether an employer-employee relationship exists under common law. While no single factor is decisive, the cumulative weight of these elements helps establish the nature of the working relationship. The key factors include:

1. Behavioral Control:

Instructions: The more detailed the instructions an employer provides, the more likely the worker is an employee. This includes guidance on when, where, and how to perform the work.

Training: If the employer provides training, especially regarding the methods and processes to be followed, it indicates a higher degree of control typical of an employer-employee relationship.

2. Financial Control:

Significant Investment: Employees typically have minimal investments in the tools and equipment necessary for their work. Employers, on the other hand, usually provide these resources.

Expense Reimbursement: Reimbursement of business expenses by an employer is a sign of financial control. Independent contractors are generally responsible for their own expenses.

3. Type of Relationship:

Contracts: A written contract specifying an ongoing relationship implies an employer-employee relationship. Independent contractors often work on a project-by-project basis.

Benefits: The provision of employee benefits such as health insurance, retirement plans, and paid leave is indicative of an employer-employee relationship.

Implications for Employers

Tax Withholding and Reporting:

One of the primary implications of the common law employee status is the responsibility for tax withholding and reporting. Employers must withhold income, Social Security, and Medicare taxes from an employee's wages. Additionally, they are required to report these taxes on Form W-2, Wage and Tax Statement.

Employment Taxes:

Employers must also pay certain employment taxes on wages paid to common law employees. These taxes include the employer's share of Social Security and Medicare taxes, as well as federal unemployment tax.

Benefits Administration:

Common law employees are generally eligible for various benefits, including health insurance, retirement plans, and paid time off. Employers are responsible for administering these benefits in compliance with applicable laws and regulations.

Implications for Workers

Tax Reporting:

Common law employees receive a Form W-2 from their employers, detailing their income, tax withholdings, and other relevant information. This form is crucial for filing accurate income tax returns.

Eligibility for Benefits:

Common law employees are typically eligible for a range of benefits offered by their employers. These may include health insurance, retirement plans, and various other perks that contribute to the overall compensation package.

Employment Rights:

Common law employees have certain legal rights and protections that may not be available to independent contractors. These rights include minimum wage requirements, overtime pay eligibility, and workplace safety standards.

The Complexity of Worker Classification

Worker classification is not always straightforward, and the consequences of misclassification can be significant. Employers must carefully assess the working relationship with individuals providing services to determine whether they meet the criteria of common law employees.

Challenges in Classification

Hybrid Roles:

Some roles may exhibit characteristics of both employees and independent contractors. Clear documentation of the working relationship becomes crucial in such cases.

Changing Dynamics:

The nature of the working relationship may evolve over time. Periodic reviews are necessary to ensure that the classification accurately reflects the current arrangement.

Industry Variations:

Different industries may have unique norms regarding worker classification. Employers should be aware of industry-specific guidelines to make informed decisions.

Addressing Worker Misclassification

Misclassification of workers can lead to legal and financial repercussions for employers. To address this, the IRS offers programs that allow businesses to reclassify workers and correct any previous misclassifications.

Voluntary Classification Settlement Program (VCSP)

The VCSP is a voluntary program that provides an opportunity for employers to reclassify their workers as employees for employment tax purposes. By participating in this program, employers can obtain partial relief from federal employment taxes.

Form SS-8 Determination

Either the employer or the worker can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. The IRS will review the facts and circumstances and provide a determination regarding the worker's status.

Best Practices for Employers

To navigate the complexities of worker classification and adhere to the IRS Common Law Employee Test, employers can implement the following best practices:

Detailed Contracts:

Ensure that contracts with workers clearly define the terms of the working relationship, including the scope of work, payment arrangements, and other relevant details.

Consistent Treatment:

Treat similarly situated workers consistently. If workers are performing similar tasks under similar conditions, their classification should align.

Regular Audits:

Conduct regular audits of worker classifications to ensure ongoing compliance. This is particularly important as working relationships evolve.

Legal Consultation:

Seek legal advice when uncertainties arise or when dealing with unique roles that may not fit traditional classifications.


Understanding the IRS Common Law Employee Test is crucial for both employers and workers to navigate the complexities of worker classification. Employers must carefully assess their working relationships and apply the relevant factors to determine whether individuals are common law employees or independent contractors. By doing so, they can fulfill their tax obligations, provide appropriate benefits, and maintain compliance with employment laws. Check with the IRS for any changes to federal laws.

Workers, on the other hand, should be aware of their classification, as it impacts their tax reporting, eligibility for benefits, and legal rights in the workplace. If there are uncertainties or concerns about their classification, workers can seek guidance from the IRS or legal professionals to address the issue.

In a dynamic and evolving workforce landscape, staying informed about the IRS Common Law Employee Test is essential for all parties involved. This knowledge empowers employers to make informed decisions and helps workers understand their rights and responsibilities in the ever-changing world of work.

Get Started With Dots Today

As employers navigate the complexities of tax obligations and worker classifications, efficient payout systems become paramount. Simplify your employee payouts with the Dots Payouts API. Whether managing common law employees, independent contractors, or a combination of both, Dots API offers a seamless and secure platform for automated payouts. Ensure accurate and timely payments while streamlining your financial processes. Get started with Dots Payouts API today and experience the benefits of a reliable payout solution.