Independent Contractor Information

We are providing clarification and guidance to ASU Departments in determining whether an individual who is engaged to provide personal services qualifies as an independent contractor or should be hired as an ASU employee. Even though the vast majority of individuals appointed as independent contractors at ASU meet the IRS criteria for independent contractors, there are several factors that can enhance such arrangements. The IRS continues to target colleges and universities for audits in this area of tax compliance. At ASU, we desire to be proactive and avoid dilemmas being experienced at some other colleges and universities.

The importance of demonstrating that independent contractor payments to individuals are for independent contractor and not employee services is to avoid the possible tax liability to ASU and the ASU Department that engages the independent contractor. If the IRS should subsequently determine that the payment should have been made as an employee and not as an independent contractor, the ASU Department having initiated the independent contractor payment could be liable for all taxes not paid to the IRS, which could amount to 40% or more of the payment amount.

The guidance provided below applies only to the appointment of individuals as independent contractors and not the hiring of companies or organizations as independent contractors. Paying companies and organizations for services rendered is always an independent contractor arrangement, since companies and organizations cannot be hired as employees. Since an individual can be paid as either an employee or as an independent contractor, it is important from a tax perspective that the individual meet stringent criteria in order to qualify as an independent contractor.

Approval of Independent Contractor Status Before Appointment

It is imperative that approval by the Financial Services tax unit be obtained for independent contractor treatment before the independent contractor begins work. If an ASU Department waits until time of payment to submit the employee/independent contractor determination checklist and it is then determined that the individual should be treated as an employee, there is then a violation by the ASU Department of not only ASU policy for the hiring of employees but also State Law for making untimely payment to the employee. For such situations, payment to the individual as an employee is further delayed. Such after-the-fact employment could subject ASU, the ASU hiring department, and/or the ASU employee not following University procedure to various Federal and State fines and penalties.

Control and Supervision:

A basic difference between an independent contractor and employee is that when an independent contractor is hired, ASU only indicates the overall final results and objectives to be achieved, and not the methods or means for accomplishing the results. If the individual is subject to the will and control of ASU as to not only what is to be done, but also how it shall be accomplished, then the individual is an employee. Individuals hired as independent contractors must have the right to accomplish the final results and objectives without ASU having the right to control the means and methods to be used in achieving the desired results. Unless there is this level of independence regarding determination of the means and methods to be used in accomplishing end results, the individual is an employee and not an independent contractor.

Fixed Fee Versus Hourly Rate

The determination that an individual being appointed for a project is an independent contractor and not an employee is enhanced when the individual is paid a fixed fee and not on an hourly rate. While it is appropriate to determine the fixed fee by negotiating up front an estimated number of hours at an agreed upon hourly rate, the payment terms should then be stated as a fixed fee, whenever possible. For a fixed fee situation, the financial risk is then primarily with the independent contractor and not the university. This is an important characteristic of an independent contractor relationship. If the independent contractor is able to complete the project in less time, the financial benefit from spending less time accrues to the independent contractor and if the independent contractor takes more time to complete the project, the financial detriment is also with the independent contractor.

Independent contractor payments should, if at all possible, be on a fixed fee basis for the project, since employee/employer relationships are almost always on an hourly pay basis. Paying an independent contractor on an hourly basis can initially appear to be that of an employee/ employer relationship and should be avoided if at all possible.

Expense Reimbursements Versus No Expense Reimbursements

The determination that an individual being appointed for a project is an independent contractor and not an employee is also enhanced when the individual is responsible for his/her own travel and other expenses and does not receive expense reimbursement, since provision for the individual’s expenses can be included as part of the fixed professional fee. There will, however, be situations where paying an expense reimbursement does not void the determination that the individual is an independent contractor. An appropriate situation from a tax perspective would be an ASU Department bringing in, from two different locations, two guest lecturers for a one day presentation and deciding to pay each guest lecturer the same professional fee after consideration of the differing level of expenses to travel to ASU. The payment of equal professional fees and actual expense reimbursement would not, by itself, void independent contractor determination for this situation.

If at all possible, independent contractor payments should not include expense reimbursements, since employee/employer relationships are almost always on an expense reimbursement basis for travel and other out of pocket expenses.

Independent contractor payments on an hourly rate with expense reimbursements also being paid is one of the most difficult situations to justify. Support for an independent contractor appointment is enhanced when no expense reimbursements are paid separately, even though provision for expenses can be included in the determination and negotiation of the total fixed fee amount.

Limited Duration of Assignment

Contractual relationships that are longer than 30 days, with very few exceptions, indicate that an employee/employer relationship rather than an independent contractor relationship exists. This is especially true for an independent contractor being paid on an hourly basis.

There are also situations where individuals may have contractual arrangements extending beyond 30 days, where their primary work and presence on campus is less than 30 days, with the rest of their time being devoted, on a part time basis, to advance preparation for their visit and report writing after their visit. Examples of such situations are the appointment of a conference leader or peer review team member. These situations of work effort of more than 30 days are acceptable if the period of primary work effort and presence on campus is 30 days or less. Where the period between the start and stop date of the independent contractor assignment is more than 30 days, but the period of primary emphasis and presence on campus is 30 days or less, the ASU Department needs to make that clear when completing Section 3 of the Employee/Independent Contractor Determination Checklist , by indicating in the description of services provided the period of primary work effort and presence on campus.

When the relationship is ongoing for a semester, for example, the question that arises is whether the person appointed is in reality an employee and not an independent contractor. ASU hires visiting professors for a semester and pays these visiting professors as employees. The University also hires part-time faculty associates and pays these faculty associates as employees. The requirement to pay visiting professors and faculty associates as employees is well supported by IRS rulings at other universities.

Completion of the Employee/Independent Contractor Determination Checklist

ASU Departments need to be very thorough in completion of Section 3 of the Checklist, especially in the description of the services to be provided. It is necessary that the services to be provided are indicative of an independent contractor relationship. For many situations, the ASU Department may need to attach an additional sheet or services contract to further describe the services to be provided and/or explain why the appointment is still an independent contractor when there are elements of the relationship that may initially suggest that an employee and not an independent contractor arrangement, such as when (1) the duration of the services is more than 30 days, (2) the independent contractor is being paid on an hourly basis, and/or (3) travel or other expenses are also being paid.

Also is an Independent Contractor Determination Matrix showing attributes of the service arrangement that leads to the determination of independent contractor versus employee status. The more elements supporting independent contractor status, the easier it will be for independent contractor status to be approved.
If you have any questions and/or desire any clarifications on the above guidelines, please contact your Human Resource partner or the tax unit in Financial Services.

MEMORANDUM
June 27, 1996 (updated 4/22/08)
Vice Presidents, Deans, Directors, and Department Chairs
Jerry Snyder, Associate VP for Finance and Treasurer
SUBJECT: Independent Contractor Determination Guidelines