Worker Classification

EA Part 2 — Worker Classification Exam: IRS Enrolled Agent — Part 2: Businesses Last Updated: June 2026 --- ## Why Worker Classification Matters The distinction between employees and independent contractors affects: - Who withholds and pays payroll taxes (FICA, FUTA) - Whether benefits (health insurance, retirement) must be provided - Whether worker can deduct business expenses - Employer's potential liability for back taxes, penalties, and interest Misclassification of employees as independent contractors = significant IRS enforcement risk. --- ## The Common Law Test The IRS uses the common law test based on the degree of control the business has over the worker. ### Three Categories of Control (IRS 20 Factors) Behavioral control — Does the business control how work is done? - Does the business provide training? - Does the business direct the sequence and method of work? Financial control — Does the business control the economic aspects? - Significant investment by worker (tools, facilities)? - Worker has unreimbursed expenses? - Worker is paid by the job vs. hourly/salary? - Services available to the general public? - Worker can make a profit or loss? Type of relationship — How do the parties perceive the relationship? - Written contracts characterizing the relationship? - Employee-type benefits (insurance, pension, paid leave)? - Permanency of relationship? - Integral part of business? > Exam Tip: No single factor is determinative. The IRS looks at the totality of the relationship. A written contractor agreement does NOT automatically make someone an independent contractor. --- ## Common Law Employees If the business controls not just the result but also how the result is achieved, the worker is likely an employee. Consequences of employee status: - Employer…