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Subject:Re: 1099-what are the 20 criteria? From:"Laura Lemay, Killer of Trees" <lemay -at- LNE -dot- COM> Date:Wed, 3 May 1995 17:33:00 EDT
>>out that contractors must satisfy a list of 20 criteria.
>So what are the 20 criteria, or how can I find out? I've thought of doing
>some work this way but want to go into it smart.
The "20 rules" are defined by the IRS for what constitutes an employee vs.
a true independent contractor (IC). They're listed in IRC publication
937, "Employment Taxes and Information Returns." These are the rules,
1. Employees must comply with instructions on how to do thier jobs. ICs
can work any way they want to as long as the end result is acceptable.
2. Employees are trained by the employee. ICs are responsible for thier
3. The work an employee does is integrated into the business. IC work is
"outside" work (employees are indispensable, in other words, whereas ICs
can leave at any time and the business will not suffer).
4. Employees do services personally. ICs provide services as a business
(note: sole-proprietorships break this rule!)
5. Employees can use assistants, supplies, etc. from the company.
ICs must hire and pay for all thier own supplies and assistance.
6. Employees have a continuing relationship with thier employer.
ICs do not -- work is done on a one-time basis, with a beginning and
7. Work hours are set by the employer for employees. ICs can set thier
8. Employees are required to work full-time. ICs can work as many hours
as they want, for whoever they want, non-exclusively.
9. The employee's work generally must be done on the employer's premises.
ICs can work anywhere.
10. Employees must accomplish tasks in the order or sequence set by the
employer. ICs have task lists, but no ordering.
11. Employees must submit status reports. ICs don't-- as long as the
work is done on time, everything's fine.
12. Employees are paid by the hour, week or month. ICs are paid by the
(NOTE: This is the big one that almost all ICs I know break)
13. All job-related expenses are paid by the employer for employees.
ICs pay all thier own expenses.
14. Employees are furnished tools with which to do the job. ICs must
supply thier own.
15. ICs must have an investment in the supplies and tools that they use
(home offices count as an investment)
16. ICs incur both profits and losses. Employees don't.
17. ICs can work for more than one person or firm at the same time.
18. ICs must offer services to the general public, not just to a
select set of "exclusive" clients.
19. Employees can be fired. ICs cannot as long as they are meeting the
criteria spelled out in the contract.
20. Employees can quit. ICs are responsible for the work they are
contracted to perform.
My paraphrasing here is pretty awful, but the idea is that if you or your
company is fingered by the IRS, YOU must prove that YOU are an IC and not
an employee based on these rules. And if you break *one* rule, you
are considered an employee. Its very strict and very nasty.
Agencies can get generally around most of the rules. You are WAY safer
in an agency than as a sole proprietor, because agencies generally work
one of two ways:
- You are a W-2 employee for the agency -- they pay your taxes and benefits
and training. The agency is the IC for the company. Agencies are generally
better are satisfying all the 20 rules than individuals.
- The agency is an IC for the company, and the agency hires you as
an IC. A level of indirection exists, and its easier for you to meet the
20 rules with the agency and for the agency to meet them with the company
than if the indirection wasn't there. In this case the agency may do
services like billing, but you're still responsible for everything else.
You'll generally get a better rate out of these kinds of agencies than
if you're a W-2 contractor.
If you're a sole proprietor, that is, you are an IC for the company you
are working for, it is likely you are breaking quite a few of the 20 rules,
and you should be very very careful. From what I have heard it is close
to impossible to do this an still be legal -- the closest you can get is
to incorporate and effectively be your own agency.
And yes, it is the employer who gets dinged if you're ruled as an
employee and not an IC. But keep in mind that if you're ruled as an
employee, you can no longer claim yourself as a business. You lose all
your business deductions for that year, you can no longer claim a home
office, etc. etc. etc.
I'm not a CPA, but I just did a ton of research about this recently because
I just started consulting and I was nervous. I'm still nervous (which
is why I've hired a CPA to make sure I'm doing things right).