TN 7 (08-10)

RS 02101.060 Financial Control Involving Opportunity for Profit or Loss


IRS Revenue Ruling 70-309

A. Definition

Profit or loss implies the use of capital by an independent businessperson. Therefore, higher earnings resulting from opportunity, such as from pay on a piecework basis, or gain or loss from a commission arrangement, is not profit or loss.

B. Introduction

It is generally dependent upon management decisions on whether an individual can realize a profit or suffer a loss. The one responsible for a profit or loss is free to use skill, initiative, and judgment to conduct a business or enterprise. Establish the opportunity for profit or loss when the independent businessperson:

  • agrees to perform specific jobs for prices agreed upon in advance and to pay expenses incurred in connection with the jobs;

  • has continuing and recurring liabilities or obligations, and succeeding or failing depends on the relation of receipts to expenses;

  • has his or her own office, equipment, materials, or other facilities to do the work;

  • hires, directs, and pays assistants; and

  • performs services, or pays assistants to perform services, which establish or affect his or her business reputation, but not the reputation of those who purchase the services.

C. Employee status involving profit or loss

Generally, employees are workers who receive predetermined earnings, have little chance to realize significant profits or losses through their work, and receive pay at a fixed rate regardless of the employer’s success. For example, John receives pay on a straight commission basis, has unreimbursed business expenses, and makes business decisions. It is unlikely that John is able to realize a profit or suffer a loss, even if he does not have a significant investment and does not market his services.

D. Independent contractor status involving profit or loss

Generally, an independent contractor is the worker in a position to realize a profit or suffer a loss because of his or her services. For example, if a worker is subject to risk of economic loss due to significant investments or is liable for expenses, such as salary payments to unrelated employees, then the worker is an independent contractor. However, the risk that a worker will not receive payment for his or her services does not constitute a sufficient economic risk to support treatment as an independent contractor because that risk is common to both independent contractors and employees. 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.

E. Reference

Social Security Handbook, section 819 : Do you have the opportunity for profit or loss?