13.2 Common Law Test (Behavioral, Financial, Relationship)
Key Takeaways
IRS replaced the old 20-factor test with a three-category framework (behavioral, financial, relationship).
Behavioral Control: right to direct HOW work is done (instructions, training, tools).
Financial Control: opportunity for profit or loss; investment; unreimbursed expenses; multiple clients.
Type of Relationship: written contracts, benefits, permanency, core-business function.
No single factor is decisive — weigh the totality of facts.
Training plus detailed instructions strongly indicates employee status.
Common Law Test (IRS Three-Category Framework)
Why This Matters for the Exam
The three-category test is the modern IRS framework for classification (it replaced the old 20-factor common-law test). For the 2026-2027 testing window you are tested on this rule as of December 31, 2025 — the framework itself was not changed by OBBBA.
The Three Categories
| Category | Key Question |
|---|---|
| Behavioral | Does business control HOW work is done? |
| Financial | Who has opportunity for profit/loss? |
| Relationship | What is the nature of the relationship? |
Behavioral Control Indicators
| Factor | Employee | Contractor |
|---|---|---|
| Instructions | Detailed (when, where, how) | Minimal |
| Training | Required by business | None |
| Evaluation | How work is performed | End result only |
| Tools/equipment | Provided by business | Worker's own |
Financial Control Indicators
| Factor | Employee | Contractor |
|---|---|---|
| Investment | Minimal | Significant |
| Expenses | Reimbursed | Unreimbursed |
| Profit/Loss | Paid regardless of outcome | Can lose money |
| Market availability | One employer | Multiple clients |
Type of Relationship Indicators
| Factor | Employee | Contractor |
|---|---|---|
| Written contract | Less important to IRS | Often states non-employee |
| Benefits | Health, 401(k), PTO | None |
| Permanency | Indefinite | Project-based |
| Core function | Key to business | Ancillary |
Case Study (2025)
Scenario: Mark, a web developer:
- Behavioral: Daily meetings, mandated documentation style = high control.
- Financial: Monthly retainer, firm provides laptop = high control.
- Relationship: No other clients, indefinite engagement, work is core = high control.
Result: Mark is an employee — firm must withhold income tax, pay employer FICA (6.2% SS on wages up to $176,100; 1.45% Medicare uncapped), and pay FUTA on first $7,000.
On the Exam
Question types to practice on common law:
- Factor Questions: "Which category does training fall under?"
- Classification Questions: "Based on these facts, employee or contractor?"
- Key Indicator: "What most strongly supports contractor status?"
The key is to remember: Behavioral = how. Financial = profit/loss. Relationship = benefits/permanency. Training = employee. Multiple clients + significant investment = contractor.
Consultant: flat fee, pays own travel, chooses tools/hours. Strongest contractor factor?
Behavioral Control
Financial Control (Profit/Loss)
Relationship (Benefits)
Permanency
Designer: weekly training, company workstation/software. Which category?
Financial Control
Behavioral Control
Type of Relationship
Statutory Status
Worker performs "key aspect" of business operations. IRS leaning?
Definitely contractor
More likely employee
Definitely employee
Factor is irrelevant
Sections you finish are checked off in the contents.