IRS 20-Factor Test

The IRS 20-Factor Test is the worker classification framework set out by the Internal Revenue Service in Revenue Ruling 87-41, 1987-1 C.B. 296. The ruling lists twenty common-law factors drawn from court decisions that the IRS used to decide whether a worker is an employee or an independent contractor for purposes of federal income tax withholding, the Federal Insurance Contributions Act (FICA), and the Federal Unemployment Tax Act (FUTA). The 20 factors remain the historical foundation for the IRS analysis, although the IRS has since reorganized them into three modern categories in Publication 15-A and Topic No. 762 (irs.gov Topic 762).

Origin: Revenue Ruling 87-41

Revenue Ruling 87-41 was issued in 1987 and is the canonical IRS statement of the common-law control test for worker classification. The ruling does not invent the 20 factors. It collects them from federal court opinions applying the common-law test to specific occupational fact patterns. The ruling explicitly cautions that no single factor controls the outcome, that the importance of each factor varies by occupation, and that the analysis is a totality-of-the-circumstances determination.

The 20 factors are commonly grouped into three categories that map to the modern IRS framework: behavioral control, financial control, and the relationship of the parties.

The 20 Factors

The twenty factors, drawn from Revenue Ruling 87-41, are:

Factor	Description
1. Instructions	Worker required to comply with the hiring entity’s instructions about when, where, and how to work
2. Training	Hiring entity trains the worker
3. Integration	Worker’s services are integrated into the hiring entity’s business operations
4. Services rendered personally	Services must be rendered personally by the worker
5. Hiring assistants	Hiring entity hires, supervises, and pays the worker’s assistants
6. Continuing relationship	The relationship between the worker and hiring entity is continuing
7. Set hours of work	Worker has set hours of work established by the hiring entity
8. Full time required	Worker must devote substantially full time to the hiring entity
9. Doing work on hiring entity’s premises	Work is performed on the hiring entity’s premises
10. Order or sequence set	Worker must perform services in an order or sequence set by the hiring entity
11. Oral or written reports	Worker must submit regular oral or written reports
12. Payment by hour, week, or month	Payment is by the hour, week, or month rather than by job or commission
13. Payment of business and travel expenses	Hiring entity pays the worker’s business and travel expenses
14. Furnishing of tools and materials	Hiring entity furnishes significant tools, materials, and equipment
15. Significant investment	Worker has no significant investment in facilities used for work
16. Realization of profit or loss	Worker cannot realize a profit or suffer a loss
17. Working for more than one firm at a time	Worker performs services for only one hiring entity
18. Making service available to general public	Worker does not offer services to the general public
19. Right to discharge	Hiring entity has a right to discharge the worker
20. Right to terminate	Worker has the right to terminate the relationship without liability

The presence of factors leaning toward “employee” makes employee classification more likely, but no single factor is dispositive.

How the 20 Factors Map to Modern IRS Categories

The IRS today presents the common-law analysis through three categories in Publication 15-A and Topic 762 (irs.gov Topic 762):

Modern Category	Underlying 87-41 Factors
Behavioral control	Instructions, training, integration, set hours, sequence, reports, premises
Financial control	Expenses, tools, investment, profit and loss potential, payment method, services to public
Relationship of the parties	Continuing relationship, full-time work, integration, right to discharge, right to terminate, employee-style benefits

Behavioral control asks whether the hiring entity has the right to direct how the work is performed. Financial control asks whether the worker has economic skin in the game beyond labor. The relationship of the parties asks whether the engagement looks like an employment relationship in form and duration.

When the IRS 20-Factor Test Applies

The 20-Factor Test, and the broader common-law test it implements, applies to federal employment tax determinations: income tax withholding, FICA (Social Security and Medicare), and FUTA (federal unemployment). Either party can request a formal IRS determination by filing Form SS-8, Determination of Worker Status. Processing typically takes several months.

The IRS 20-Factor Test does not control state law analyses. The ABC Test governs in many states for unemployment insurance and, in a smaller set of states, for wage and hour purposes. The Economic Reality Test governs federal Fair Labor Standards Act questions handled by the US Department of Labor.

Why the IRS 20-Factor Test Matters for US Companies

For companies engaging US contractors, the 20-Factor Test is the federal tax baseline. A misclassification finding by the IRS produces back federal income tax withholding, employer and employee shares of FICA, FUTA, interest, and penalties. The Section 530 safe harbor can limit some of that exposure if the company can show reasonable basis and consistent treatment, but Section 530 applies to federal employment tax only.

How Omnivoo Helps

Omnivoo Contract Management captures the 20-factor evidence in the contractor record itself. Each engagement stores the answers that map to behavioral control, financial control, and the relationship of the parties, so the classification analysis is consistent and the supporting documentation is in one place if the IRS reviews the file.