The Common-Law Test helps determine whether someone working for a business is an employee or an independent contractor. It’s not new—this test has been around a long time and is still one of the key tools the IRS and other agencies use when classifying workers. The classification matters because it affects taxes, benefits, and a company’s legal responsibilities.
How does the Common-Law Test determine worker status?
It all comes down to control. The test looks at how much control a business has over what the worker does and how they do it. If the business controls the details—like work hours, tools used, and how tasks are completed—the worker probably counts as an employee. If the worker calls more of the shots and works independently, they might be a contractor. It’s a judgment call based on several pieces, not just one thing.
What factors are part of the Common-Law Test?
There are three main categories:
Behavioral control: Does the company control how the work is done?
Financial control: Does the company control how the worker is paid or reimbursed?
Type of relationship: Are there benefits, a written contract, or an expectation of ongoing work?
It’s a total picture approach. You look at all the facts, weigh them, and see what direction it points in. One factor alone usually isn’t enough to decide.
How does the IRS use the Common-Law Test?
The IRS uses it when reviewing how a business has classified workers for tax purposes. If a company calls someone an independent contractor, but the IRS thinks that worker is actually an employee based on the test, the company could owe back taxes and penalties. Employers can also file Form SS-8 if they’re unsure how to classify someone. The IRS will review the situation and give a ruling.
How is the Common-Law Test different from the ABC Test?
The ABC Test is stricter. It puts more weight on proving a worker is truly independent. It’s used in some states, like California, mostly for wage and labor issues. The Common-Law Test is more flexible and used more often at the federal level, especially by the IRS. While both tests aim to answer the same question—employee or contractor—they use different rules to get there.
What happens if a worker is misclassified under the Common-Law Test?
If a company misclassifies a worker, it can lead to trouble. The business might have to pay employment taxes it didn’t withhold, plus penalties and interest. The worker might miss out on benefits they should’ve received. And both sides could get pulled into audits or legal issues. It’s better to get it right from the start than to clean up the mess later.
