Accounts Payable - Employee or Independent Contractor?

IRS regulations stipulate that an employer/employee relationship exists whenever the hiring entity can exercise substantial control over the individual and the method of performing the services. When this relationship exists, the University must withhold and remit to the IRS applicable payroll taxes. Failure to do so, would result in a liability to the University for the payroll taxes that should have been withheld plus penalties and interest.

The IRS has identified 20 factors that are used as guidelines to determine whether sufficient control is present to establish an employer-employee relationship. These factors are listed below.

When retaining the services of an individual, you must review these factors to determine whether you are engaging in an employer/employee, or independent contractor relationship. If it is determined that you are engaging in an employer/employee relationship payments(s) to the individual must be made through the payroll system and applicable payroll taxes must be withheld. Under these circumstances follow the following steps:

1.) Obtain an OPS "Sign-On" packet from the Office of Human Resources.
2.) Request the individual to complete the forms included in the sign-on packet.
3.) Complete a Personnel Action Form or an OPS employment contract indicating the amount to be paid for the services provided.
4.) The individual must deliver the sign-on papers in person to the Office of Human Resources for verification of employment eligibility (Form I-9). Verification can take place at the department provided that an employee in the department has been delegated this responsibility by the Office of Human Resources.

The 20 factors provided by the IRS as a guide to determine the type of relationship between an entity and an individual are as follows:

Instruction: An employee must comply with instructions about when, where and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.

Training: An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.

Integration: An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.

Services Rendered Personally: An employee renders services personally. This shows that the employer is interested in the methods as well as the results.

Hiring Assistants: An employee works for an employer who hires, supervises and pays workers. An independent contractor can hire, supervise and pay assistants under a contract that required him or her to provide materials and labor and to be responsible only for the results.

Continuing Relationship: An employee generally has a continuing relationship with an employer.

Set Hours of Work: An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours.

Full-time Required: An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.

Work Done on Premises: An employee may be required to perform services in the order or sequence set by an employer.

Order or Sequence Set: An employee may be required to perform services in the order or sequence set by an employer.

Reports: An employee may be required to submit reports to an employer.

Payments: An employee is generally paid by the hour, week or month. An independent contractor is usually paid by the job.

Expenses: An employee's business and travel expenses are generally paid by an employer.

Tools and Materials: An employee is normally furnished significant tools, materials and other equipment by an employer.
Investments: An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.

Profit or Loss: An independent contractor can make a profit or suffer a loss.

Works for More than One Person or Firm: An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.

Offers Services to General Public: An independent contractor makes his or her services available to the general public.

Right to Fire: An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.

Right to Quit: An employee can quit at any time without incurring a liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete it.