The IRS 20-Factor Test: What Small Businesses Should Know Today

Why people still talk about the “IRS 20-factor test”

The phrase comes from Revenue Ruling 87-41, which collected twenty common-law factors the IRS used to help evaluate whether a worker was an employee. The list remains useful history and many tax discussions still cite it, but it should not be turned into a worksheet where eleven “contractor” boxes beat nine “employee” boxes.

IRS training materials introduced the three-category grouping in 1996; current IRS guidance groups common-law evidence under behavioral control, financial control, and type of relationship. The current Internal Revenue Manual expressly calls the twenty-factor list an analytical tool, not the legal test, and says the IRS uses this modified three-category approach because the list is difficult to apply and business trends have changed. The older factors remain useful as a completeness check for which facts to investigate; they are not a points-based test.

The twenty historical factors

Revenue Ruling 87-41 identified these factors:

1. Instructions. A requirement to follow instructions about when, where, and how to work can indicate control. 2. Training. Training a worker in required methods can show that the business wants the service performed in a particular way. 3. Integration. Services integrated into business operations can suggest the worker is subject to direction and control. 4. Services rendered personally. Requiring the named worker to perform the services personally can be relevant to control. 5. Hiring, supervising, and paying assistants. Control over helpers can distinguish an independent business from a managed worker. 6. Continuing relationship. A recurring or indefinite working relationship can point toward employment. 7. Set hours of work. Hours established by the business can indicate control. 8. Full-time required. Requiring substantially full-time service can restrict the worker’s ability to conduct an independent business. 9. Work done on the employer’s premises. Location can matter when the work could otherwise be performed elsewhere. 10. Order or sequence set. Requiring work in a particular sequence can show control over method. 11. Oral or written reports. Regular reporting requirements may evidence a degree of control. 12. Payment by hour, week, or month. Time-based wages historically tended to point toward employment, while project or commission arrangements could point differently depending on the facts. 13. Payment of business or travel expenses. Reimbursement of the worker’s operating expenses can be relevant. 14. Furnishing tools and materials. Supplying significant tools can indicate that the worker lacks an independent investment. 15. Significant investment. Investment in facilities or equipment used to perform services can support an independent-business relationship. 16. Realization of profit or loss. Genuine ability to make a profit or suffer a loss through managerial decisions is important evidence of independent business activity. 17. Working for more than one firm at a time. Serving multiple unrelated customers can indicate an independent business. 18. Making services available to the general public. Advertising or otherwise offering services to the market can support contractor status. 19. Right to discharge. A business’s right to terminate a worker can be relevant to the relationship. 20. Right to terminate. A worker’s ability to end the relationship without liability can also be relevant.

These summaries are not substitutes for the Revenue Ruling or current IRS guidance. Several factors require context, and later IRS materials reorganized the analysis.

Map the old list to the current framework

Many of factors 1, 2, 7, 8, 9, 10, and 11 concern behavioral control. Factors such as 12 through 18 often illuminate financial control. Continuing relationship and termination provisions connect to the type of relationship. Other facts can overlap categories.

That mapping explains why the old list is not a separate modern scoring system. The IRS moved toward broader categories because the common-law question is the right to control, not the arithmetic total of isolated facts.

If a review memo says “14 of 20 factors favor contractor,” replace that conclusion with analysis. Which facts show that the worker controls methods? Where is genuine business investment? Is there meaningful profit-and-loss opportunity? Is the relationship permanent? Are the services central to the business? The reasons matter more than a tally.

Three mistakes to avoid

First, do not assume every factor has equal weight. A trivial fact such as where a laptop is used may be less probative in a remote knowledge job than the company’s right to prescribe the worker’s method and schedule.

Second, do not freeze the analysis in 1987. Use current IRS publications and web guidance for the federal employment-tax question. The twenty factors are historical common-law guidance, not a replacement for current instructions.

Third, do not export the IRS factors into unrelated statutes. The FLSA uses a separate economic-reality analysis. On February 26, 2026, DOL proposed revising its analysis and said it was no longer applying the 2024 rule in investigations; as of October 8, 2026, the proposal is not final. Check current DOL guidance and controlling cases. States may use an ABC test or another statutory framework, so a favorable IRS analysis does not automatically answer those questions.

How a small business can use the list productively

Use the twenty items as an interview checklist when reconstructing an ambiguous relationship. For each relevant item, attach the real record: contract clause, calendar rule, invoice, equipment receipt, training file, customer list, reimbursement policy, or termination email. Then regroup those facts under the current IRS categories and explain their significance.

This approach preserves the value of Revenue Ruling 87-41 without pretending that the IRS has a twenty-question pass/fail exam. If the resulting federal tax classification remains genuinely uncertain, Form SS-8 is the formal route for requesting an IRS determination.