TN 7 (08-10)
RS 02101.058 Financial Control Involving Significant Investments
IRS Revenue Ruling 71-524
A significant investment by a worker in facilities used to perform services for another is a factor that tends to establish the worker’s status as an independent contractor.
In general, facilities include equipment or premises (i.e., land and buildings) that employers provide that are necessary for work, such as office furniture, tools, machinery, etc. Facilities do not include tools, instruments, clothing, etc. that employees provide as a common practice in their particular trade, nor does it include education, experience, or training.
2. Significant Investments
Significant investments can be recurring and ongoing expenses such as office rent, marketing expenses, employees, business expenses, etc. There are no precise dollar limits that need to be met to have a significant investment.
C. Employee status involving significant investments
An employer-employee relationship exists when a worker who has little or no investment (i.e., investment in real assets, plant, equipment, and intangible assets) in the business and is economically dependent on the employer for facilities. Most employees rely on employers to provide equipment and work facilities. A significant investment may be a factor to establish that an employer-employee relationship does not exist if it is real, essential, and adequate (as explained below).
1. Is the investment real?
Give little weight to a worker's investment in equipment purchased from the employer if the worker's equity in the equipment is small. The same is true if the worker purchases equipment from the employer on a time basis, and until the worker pays for the equipment in full, but the employer:
retains title to the equipment;
opts to retain legal ownership and pay the worker the amount of his or her equity in the equipment at any time before the equipment is fully paid for;
requires that the worker use the equipment exclusively in to operate the business; and
directs the worker in how to use the equipment.
Such investments are not "real."
2. Is the investment essential?
An investment in equipment or premises that is not necessary to perform the services is not an essential investment. For example, Sue, a photographers' model, has a large investment in a wardrobe. She poses for Bob, a photographer, who ordinarily requires his models to wear clothing he furnishes. Sue's investment is not essential because the photographer lets her use her own wardrobe as a matter of indulgence. The photographer hired her only for her photogenic qualities and her ability to pose. The photographer does not require Sue to furnish her own wardrobe.
3. Is the investment adequate?
An investment in facilities is not adequate if the worker must rely, to an appreciable extent, on the facilities of others to perform the services. For example, a worker who operates a machine on his or her own premises and furnishes equipment that has substantial value may be a self-employed subcontractor, rather than an employee of the manufacturer.
D. Independent contractor status involving significant investments
A worker’s significant investment in the business can be evidence that an independent contractor relationship exists if the investment is real, essential, and adequate. However, a significant investment is not always necessary for independent contractor status since some work does not require large expenses.
Independent contractors may have a significant personal investment in the facilities they use for work and, unlike employees; they realize a profit or suffer a loss based on how they perform. Use special scrutiny to examine certain types of facilities, such as home offices, when making employer-employee relationship determinations.
The fact that workers own facilities that are adequate to complete their work points to an independent contractor relationship. Such ownership is an influential factor in the letting of the contract of service. The value of the worker’s investment is more important than the total value of all the facilities for doing the work.
E. Weight to give to investment factor
To determine the weight to give to the investment factor, it is important to establish who has the right to control the facilities. Ownership of equipment or premises by the worker points to an independent contractor st