CPM Worker Classification & ABC Test 3 — Questions and Answers
Question 1: Section 530 of the Revenue Act of 1978 provides employers relief from employment tax liabilities if they can demonstrate all of the following EXCEPT:
- Reasonable basis for treating workers as contractors
- Consistent treatment of similarly situated workers
- Required information reporting (1099s) filed timely
- Signed independent contractor agreements with each worker (Correct answer)
Correct answer: Signed independent contractor agreements with each worker
Section 530 relief requires reasonable basis, consistency, and timely information reporting, but does not require signed independent contractor agreements.
Question 2: A payroll manager discovers that a worker classified as an independent contractor was actually performing work under direct supervision. Which form should the worker file to request IRS determination of their status?
- Form SS-4
- Form SS-8 (Correct answer)
- Form W-9
- Form 8919
Correct answer: Form SS-8
Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) is filed to request an IRS ruling on worker classification.
Question 3: Under the common law control test, which factor is given the GREATEST weight in determining worker classification?
- Method of payment (hourly vs. project)
- Behavioral control over how the work is performed (Correct answer)
- Whether the worker provides their own tools
- The length of the working relationship
Correct answer: Behavioral control over how the work is performed
Behavioral control—specifically the right to direct and control how the worker performs the job—is the primary factor under the common law control test.
Question 4: A company treats 50 software developers as independent contractors but classifies 5 similar developers as employees. Under Section 530, this inconsistency would:
- Have no effect if the company has written contracts with all developers
- Disqualify the company from Section 530 relief (Correct answer)
- Only affect the 5 employees' tax treatment
- Be resolved by averaging the two classification methods
Correct answer: Disqualify the company from Section 530 relief
Section 530 requires consistent treatment of all workers in substantially similar positions; inconsistent treatment disqualifies the employer from safe harbor protection.
Question 5: Which of the following is a 'reasonable basis' under Section 530 for treating workers as independent contractors?
- The company's HR director personally believes the workers are contractors
- A prior IRS audit that examined the classification and made no change (Correct answer)
- The company's competitors classify similar workers as contractors
- A verbal assurance from the workers that they prefer contractor status
Correct answer: A prior IRS audit that examined the classification and made no change
A prior IRS audit in which the same classification was examined and left unchanged constitutes a recognized reasonable basis for Section 530 purposes.
Question 6: Under the ABC test, Prong C typically requires that the worker be:
- Licensed by a state regulatory authority
- Engaged in an independently established trade, occupation, or business (Correct answer)
- Performing work on a project-by-project basis only
- Registered as a sole proprietor or LLC
Correct answer: Engaged in an independently established trade, occupation, or business
Prong C of the ABC test requires that the worker be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the work performed.
Question 7: A payroll manager at a construction company must classify workers under a state that adopted the ABC test for unemployment insurance. A carpenter who works solely for one general contractor fails which prong most clearly?
- Prong A — direction and control
- Prong B — outside usual course of business
- Prong C — independently established business (Correct answer)
- Both Prong B and Prong C
Correct answer: Prong C — independently established business
A carpenter working exclusively for one contractor likely fails Prong C because they do not operate an independently established carpentry business serving multiple clients.
CPM Worker Classification & ABC Test 3
Section 530 of the Revenue Act of 1978 provides employers relief from employment tax liabilities if they can demonstrate all of the following EXCEPT: