• Does it Matter? Tax Consequences
• Does it Matter? Non Tax Consequences
• Government's Viewpoint
• Who is an Employee?
• Will and Control are the most Important Factors
• Twenty Factor Test
• Prime Factors
• Prime Factors Continued...
• Other Factors
• Rulings Involving Universities
• Rulings Involving Universities Continued...
• Conclusion
• Who to Call???
• Contractor vs. Employee Form

Does it Matter?
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    Tax Consequences

        *EMPLOYER 

• Employer Share of FICA 
• Employer Share of Retirement (if eligible)
• State Unemployment
• required to withhold taxes (Fed and State)

*EMPLOYEE 

• Employee Share of FICA
• Employee Share of Retirement (if eligible)
• Taxes withheld from paychecks (Fed and State)

There are many consequences related to worker classification. The biggest issue is whether or not taxes are withheld, or paid later. Income is taxable regardless. Independent contractors are required by law to report income, even if it falls below the $600 threshold for reporting. IC is also required to pay FICA.....employee AND employer share. They can then deduct the employer share from taxable income. Major difference is the manner in which business expenses are treated.

    Non Tax Consequences
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        *EMPLOYER 

• High cost of benefits for employees
• Greater Accounting Burden
• Greater Tort Liability (Workers Comp., General Liability)

*EMPLOYEE 

• Worker can generally earn more as a contractor
• Some would rather receive cash instead of non-cash benefits
• Liability
  
  • Liability is a major issue.
  • Independent Contractors must provide their own workers comp and liability insurance.
  • Employees are covered by the University’s and the state’s umbrella coverage.
  • We must have an appropriate contract with an independent contractor, detailing what is expected of them and of us, including liabilityand work comp insurance.

Government's Viewpoint
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IF WORKERS ARE CLASSIFIED AS EMPLOYEES, TAXES ARE WITHHELD PAID OVER AT THE SOURCE. THE BURDEN IS ONTHE WORKER TO FILE TAX RETURNS TO OBTAIN REFUNDS, AND COMPLIANCE PROBLEMS ASSOCIATED WITHSELF-EMPLOYMENT ARE DIMINISHED.
 
Remember, being an independent contractor DOES NOT relieve the worker of tax responsibility.
State and Federal Income taxes are still due on the income. And, generally, FICA taxes will also be due. An independent contractor mustpay both employer and employee share of FICA. They may then deduct employer share as a business expense.
Major difference is in the treatment of business expenses (if any).

Who is an Employee?
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Generally, a common law employer-employee relationship exists when the person for who services are performed has the right tocontrol and direct the individual who performs the services, not only as to the result to be accomplished but also as to the detail andmeans by which that result is accomplished.

NOTE: It is not necessary that the employer actually direct or control the manner in which services are performed:
It is sufficient that he has the right to do so!

Twenty Factor List
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1. Instructions followed by worker.
2. Training provided to worker. 
3. Integration of workers services into the business operations. (See APM 50.12C)
4. Services rendered personally by worker.
5. Hiring, supervising and paying assistants of worker by payer.


6. A continuing relationship
7. Set hours of work.
8. Full time required.
9. Doing work on premises of entity for whom work is performed.
10. Order or sequence of work followed.
11. Oral or written reports required.


12. Payment by hour, week, month, etc.
13. payment of business and/or traveling expenses.
14. Furnishing tools and materials.
15. Significant investment by worker.
16. Profit/loss realization by worker.
17. Working for more than one firm at a time.


18. Making services available to the general public
19. Right to discharge worker.
20. Right to terminate agreement by worker

Prime Factors
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• The degree of control exercised by the employer over the details of the work.

1. Again, control is the main issue, does the employer have the right to exercise control over how the work is done.

2. Do we have an on-going relationship....have they been our worker for years (and do they provide these services to others?)

3. Can we discharge the worker without breach of contract consequences?

4. Can the worker actually experience a loss?....what have they put at risk?....do they have a "business" investment?

Prime Factors Continued...
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• The relationship that the worker and the employer believe they are creating.
• Which party invests in the facilities used in the work.
• Whether the work is part of the employer's regular business.

5. Is the work all done in our facility? Especially preparations work or fabrication of materials.

6. Is this OUR regular line of work (i.e. offering educational services?, research?, public service?)

Other Factors
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• SKILL
• DOCUMENTATION OF PARTIES INTENT
• INDUSTRY CUSTOM
• BENEFITS
• INSURANCE

Skill---Independent contractors are generally viewed as skilled workers whereas less skilled workers are more likely to be classified asemployees.

Intent---The University and the department should reflect their intent to establish an independent contractor relationship in all contractsand correspondence. Contracts should explicitly address factors cited by the IRS to determine worker status. The right of the university tocontrol the manner in which the services are performed should specifically be relinquished.

Industry Custom---A clear industry custom to treat similarly positioned workers as IC could prove useful.

Benefits---Failure to provide workers with bonuses, paid sick leave, paid vacation time, or deferred compensation arrangements may alsohelp establish an IC relationship.

Insurance---Failure of the company to provide liability or health insurance to workers may help establish worker as IC.

Rulings Involving Universities
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• TAM 9105007 found that part-time instructors were employees, even though they had other professions. Issue was control.
• PLR 8925001 found that Adjunct faculty were employees.
• PLR 7810059 found that Adjunct faculty were employees even though no fringe benefits were paid.

TAM 9105007 -- Provides a good discussion of the elements that should be considered in determining whether a worker should be treatedas an employee or as an IC. Concluded part-time professors were employees because of the elements of control existing in therelationship.

PLR 8925001 -- Adjunct were not eligible for pensions, vacation, sick leave or other fringes. Paid only for teachers, not for class prep orcounseling. Not paid if class is cancelled for lack of enrollment.

School provides equipment and materials

School selects books, sets hours, provides substitutes, continuing relationship throughout semester. The students relationship is with theschool not with the adjunct. Adjunct must teach all who sign up for class.

PLR 7810059 -- Evening college classes. No supervision of the adjunct. only reports due were mid-term and final grades. Reg. classschedule, hours and classroom provided by the school. Had to teach all who signed up. School retains RIGHT to control .

Rulings Involving Universities Continued...
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• Revenue Ruling 70-308 found Continuing Studies Instructors to be employees.
• Revenue Ruling 70-363 found practicing attorneys who are instructors an substitute teachers for the college of law to be employees.
• PLR 8620029 Teacher in Adult Education program was ruled an employee.

Rev Rul 70-308 --

    School sets curriculum, what is taught, what is required of students.

    School provides facilities and materials, fees are paid to school.

    Instructors follow curriculum, subject to periodic review.

    Either party may terminate without liability.

    Employees.

Rev Rul 70-363 -- 

    Had to teach at set times using school facilities and equipment. Students relationship is with the school. Have to teach anyone who signsup.

    Being a practicing attorney is not relevant to determination.

    Employees.

PLR 8620029 -- 

Teacher teaches in an adult continuing ed program. No on-going commitment between school and teacher after course ends.

Students evaluate teacher, course title, date, time, and fees amount set by school. Course can be cancelled by school for lack of enrollmentwithout liability.

Employee.

Conclusion
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• Generally, anyone hired to teach will be considered to be an employee. Main issue here is if the class is a regular offering, issuing UI credit.
• If the person you are hiring is already an employee, any additional work for the university will be considered employment income.
• Generally, to be considered an independent contractor, the worker must be in the business of providing similar services to other entities.
• The IRS always leans towards characterizing workers as employees.

Additional duties will generally be considered employment if the person is already an employee. IRS has become more and more firm onthis issue.

Some exceptions...Royalties paid to employees are not wages.

On some occasions if duties are far removed from employment duties.

i.e. Business faculty, an artist on the side, hired to paint a mural for wall during a remodel....could be structured as an IC relationship.

But, if he were hired to develop dept. financial plan, this would probably be considered admin duties and employment.

Who to Call???
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Linda Keeney, Manager Accounts Payable/Travel
lkeeney@uidaho.edu or 885-5379