BlogBusinessBusiness FormationEmploymentSmall BusinessStartupsIndependent Contractors: The Economic Realities Test

January 19, 2022by Jeffrey Davis

The Economic Realities Test

Similar to the common law test, the economic reality test focuses on the degree of control exercised by the employer as an essential factor in determining whether an employer-employee relationship exists. While no single factor is controlling or decisive in determining whether an employment relationship exists, the facts and circumstances that courts and federal enforcement officials examine in deciding whether an individual is an employee or an independent contractor are:

  • the degree to which the employer controls or directs the manner in
    which work is performed,
  • whether the worker’s opportunity for profit or loss depends on his or
    her managerial skills,
  • whether the worker’s duties are performed for the employer on an
    ongoing or permanent basis,
  • whether the service performed by the worker is an integral part of the
    employer’s business,
  • the extent of the worker’s investment in equipment or materials needed to perform the job, and
  • the degree to which the worker is engaged primarily for the benefit of
    the employer.

The IRS considers a worker to be your employee if you have the right to control not only what work will be done, but also how the worker will do it. If you treat a worker as an independent contractor, but the IRS decides you have sufficient control over the worker to create an employment relationship, the IRS can hit you with a costly bill for the employment taxes you should have been withholding and paying.

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