Employment tax & worker classification

What this does

How to read it Visual: tug-of-war meters for employee vs IC, plus a wage-vs-market gauge.

Watch out Common-law factors (exam-level). No single factor controls — weigh the cluster.

Weigh worker classification factors (behavioral / financial / relationship) and stress-test S corp reasonable compensation.

Visual: tug-of-war meters for employee vs IC, plus a wage-vs-market gauge.

Worker classification decision tree

Behavioral: firm controls when/where/how work is done
Behavioral: training / detailed instructions provided
Behavioral: worker sets own methods & schedule
Financial: firm provides tools / unreimbursed expenses rare
Financial: worker has significant unreimbursed expenses / own tools
Financial: worker can realize profit or loss
Relationship: employee benefits / permanency expected
Relationship: services are key to regular business
Relationship: written IC agreement & works for multiple clients

Teaching lean

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Employee score

IC score

Employee lean0%

IC lean0%

Factor tug-of-war

S-corp reasonable compensation checkpoint

S-corp net profit before officer comp W-2 wages paid to shareholder-employee Comparable market wage for services (estimate) Distributions taken

Compensation flag

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Wage / market: —

Wages vs market—

Wages · market · distributions

Exam trap: Labeling a worker “independent contractor” on a 1099 does not control — substance of behavioral/financial/relationship factors does. S-corp shareholders who provide substantial services must take reasonable compensation subject to employment tax before treating residual as distributions.

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Study tool only — not official IRS software. Figures labeled 2025 track law/forms through Dec 31, 2025. Confirm against current IRS pubs before the exam.