Handbook of Business Procedures
Dec. 7, 2010
March 11, 2011
12.3. CLASSIFICATION OF INDEPENDENT CONTRACTORS VERSUS EMPLOYEES
All individuals paid for professional services must be classified as either an independent contractor or as a short-term, casual university employee. The Internal Revenue Service (IRS) governs policy used in determining whether an individual is performing services as an independent contractor or employee. The University of Texas at Austin is concerned with making the proper worker classification because the university is responsible for unpaid taxes due to misclassification. If the university improperly classifies an individual as an independent contractor rather than an employee for tax purposes, the university will be responsible for the applicable employer and employee portions of employment taxes, as well as penalties and interest for these payments.
An independent contractor generally has a high level of expertise, requires no training, provides services to the general public, and will have more than one customer.
A casual employee is considered an employee of the university for income tax purposes based on the evaluation of the individual's relationship with the university and the degree of control the university has over the individual. A casual employee typically requires training or supervision and has no other customers. The term “casual employee” was created by the university to distinguish this type of employee from regular university employees that have assignments through Human Resource Services (HRS). An individual providing continuing services of more than two weeks in duration is not considered a casual employee and should be assigned to a university position. A formerly appointed employee who provides services similar to those of his or her former position may also be considered a casual employee due to the continuing employee/employer relationship.
B. Common Law Classification of Workers
The IRS classifies workers as independent contractors or employees according to common law standards. Under common law, worker classification is defined by the law of agency, which determines whether the principal is legally responsible for the acts of the agent and whether the principal has the right to direct and control the agent. Following this standard, IRS regulations provide that an employer/employee relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services. An employer has the right to set requirements for an employee, not only regarding what work shall be done, but also how it shall be done. Additionally, when training is necessary, the worker is classified as an employee.
C. The 20 Factors Identified by the IRS
The 20 factors identified by the IRS are explained on page 3 of the Present Law and Background Relating to Worker Classification for Federal Tax Purposes document, which is used in court decisions to determine worker status. This test is an analytical tool and not the legal control test for determining worker status. A correct determination can only be made by examining the relationship of the worker and the business. Depending on the nature of the business, elements of the 20 factors may or may not apply.
The university developed a checklist incorporating the elements of the 20 factors that are relevant to the university environment. This checklist is known as the Employee/Independent Contractor Classification Checklist (EICCC) and is a separate form used with the electronic PBS or Authorization for Professional (Individual) Services paper APS to properly classify an individual's worker status when the individual is engaged to perform services. For professional service contracts, the Office of the Vice President and Chief Financial Officer requires the EICCC to be attached to the contract.
D. Employee/Independent Contractor Classification Checklist
Departmental personnel must collect the required information from the individual providing the services and complete the Employee/Independent Contractor Classification Checklist (EICCC). The EICCC should not be completed by the individual providing the services. Guidelines for completing the checklist can be viewed in the How to Complete the Employee/Independent Contractor Classification Checklist (EICCC) Presentation. Both the checklist and the Authorization for Professional (Individual) Services paper APS or electronic PBS must be completed when prior approval for the service is obtained.
Answers to the checklist items determine the appropriate classification and resulting payment voucher type. An individual classified as a casual employee is paid through Payroll Services using an OV7 payroll voucher. An individual classified as an independent contractor is paid through the Office of Accounting’s Contractor Services using a VP2 service payment voucher.
- Employee/Independent Contractor Classification Checklist
- Independent Contractor or Casual Employee?: How to Complete the Employee/Independent Contractor Classification Checklist (EICCC) Presentation
- DE 316: Independent Contractor or Casual Employee? Presentation
- Contractor Services website
- Payroll Services website
- IRS website: Independent Contractor (Self-Employed) or Employee?
- IRS Publication 1779: Independent Contractor or Employee
- 20 factors identified by the IRS on page 3 of the Present Law and Background Relating to Worker Classification for Federal Tax Purposes document