Third IRS Rule for Independent Subcontractor Determination
Yesterday, after discussing independent subcontractor determination with a client employer, I wrote this article covering remote workers.
As I have mentioned often, each state has its own set of rules for independent subcontractors. determination. The first two of the three rules—financial control and behavioral control — have been covered on this website and in many publications over the years.
The third component – type of relationship remains the least mentioned of the three rules. The IRS had updated this webpage’s rule in February 2025. You can find the info here or see the same independent subcontractor determination rules below.
From the IRS website – bolded for emphasis with my comments in italics.
Type of Relationship – Independent Subcontractor Determination
The type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
The factors for the type of relationship between two parties generally fall into the categories of:
- Written contracts – to me, this is the most critical point of all three tests when included with a certificate of insurance (if available)
- Employee benefits
- Permanency of the relationship
- Services are provided as a key activity of the business
Written contracts
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
Employee benefits
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
Permanency of the relationship
If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship. An open-ended contract with no ending date will not work here.
Services are provided as a key activity of the business.
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
Bottom Line – Independent Subcontractor Determination
Determining whether a worker counts as an independent subcontractor or an employee can be a difficult task. Use the IRS rules as a general guide. Each state produces its own exact rules.
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