IRS 3-Part Test

When considering withholding income, Social Security and Medicare taxes, and paying unemployment tax on wages paid, you the business owner must be determining whether a worker is an independent contractor or an employee.  The IRS will look to and consider all information that provides evidence of the degree of control and independence of the worker.  Facts that provide evidence of the degree of freedom and control fall into these three categories: Behavioral, Financial, and Type of Relationship.

IRS 3-Part Test
1.  Behavioral: Does the business control or have the right to control what the worker does and how the worker does his or her job?

2.  Financial: Are the business aspects of the worker’s job controlled by the business (these include things like how a worker is to be compensated, whether to reimburse the worker for expenses, who provides tools/supplies, etc.)?

3.  Type of Relationship:  Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)?  Will the relationship continue and is the work performed a vital aspect of the business?

Colorado has a similar – but more detailed – standard for classifying a worker as an independent contractor or employee.  As with the IRS’s inquiry, the ultimate question is how much control does the business assert over the worker.  The higher the degree of control, the more likely the worker will be determined to be an employee and not an independent contractor.

Colorado Employment Law 8-40-202

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