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Employee Determination

Employment arrangements should be reviewed carefully to ensure that the University is properly classifying its workers as employees or as independent contractors/consultants. While the law regarding employees has not changed, the Internal Revenue Service (IRS) has given high priority to the correct classification of employment relationships and the resulting tax implications.

Generally, an employee is an individual who performs services that are subject to the will and control of an employer–both what must be done and how it must be done. The employer can allow an employee considerable discretion and freedom of action, so long as the employer has the legal right to control both the method and the result of the services. An independent contractor is an individual over whom the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. A short or limited time span to accomplish the work has no affect on the determination of whether someone is functioning as an employee or independent contractor.

The Internal Revenue Service uses a number of factors to assist in determining if the worker is an employee or an independent contractor. There is no minimum number of factors that, if met, would determine that the individual is an employee or independent contractor. The below factors are intended as guidelines and should be considered in the context of the service being provided and employment practices at the University. If an individual clearly does not meet the conditions of an independent contractor, the IRS assumes an employee/employer relationship exists and the individual should be paid on payroll.

Before applying the IRS guidelines, however, two basic questions may clarify the process for payment of the work?

  • Does the University pay as employees others who perform essentially the same duties that are to be performed by this worker?
  • Has this worker been paid during the current calendar year as an employee?

If the answer to either of these questions is 'YES', the individual is probably an employee.

Note: The Internal Revenue Service (IRS) recognizes that an individual may perform services for a single business in two or more separate capacities. A dual status worker performs one type of service for a business as an independent contractor, but performs a different type of service for the business as an employee. Such services must be separate and distinct, (e.g. there can be no interrelation either as to duties or remuneration in the two capacities).

Even though the IRS has in some cases recognized that an individual can be properly classified as both an employee and an independent contractor – and the 1996 training manual recognizes that such a dual worker status may exist, Illinois State University must be able to clearly show that the employee’s independent contractor work is unrelated to his or her compensation or evaluation as an employee for the IRS to permit dual worker classification.

Special care should be taken when evaluating whether or not a present or former employee of the University should be hired as an independent contractor.

Present and recent former University employees should usually be paid as employees. According to IRS guidelines, a continuing relationship is one indication of an employee/employer relationship. In addition, any employment of present and former University employees as independent contractors should be evaluated carefully for other indications of employee status. In this situation, employee status might be required due to:

  • The worker was previously paid as an employee to perform essentially the same type of work.
  • The University pays other workers on an employee basis to perform similar tasks.


Common Law Rules

A set of "Common Law Rules" provides characteristics and classifications that help differentiate the work of an employee from that of an independent contractor. These fall into three categories:

  • Behavioral Control
  • Financial Control
  • Type of Relationship

In determining whether to engage an individual as an independent contractor, the hiring department must assess the work in these three areas to determine the proper status of the individual.

While typically a contractor's work has no controls by Illinois State University, it is possible that one or more control may be present without coming under the full direction of the University. For example, a contractor may work during Illinois State University office hours (indicating an employee relationship), but the individual maintains contractor status by being able to work at other times if he or she chooses. The individual may work solely for Illinois State University at the time (a possible employee relationship), but they maintain contractor status by being able to solicit business from other clients while performing services for Illinois State University.

Factors Used by IRS to Determine Independent Contractor

Factors to Determine Independent Contractor
Factors Employee Independent Contractor
  • A employee is required to comply with instructions about when, where, and how to work.
  • The instructions are generally detailed and specify how the desired result is to be accomplished.
  • Some employees may work with high levels of autonomy and discretion about when, where and how to work because they are highly proficient and conscientious workers.
  • If the University has the right to give instructions, the individual is an employee.
  • An independent decides how to do the job, establishes his or her own procedures, and is not supervised.
  • The University is only interested in the end result.
  • Training of a worker by an experienced employee, by correspondence, by required attendance at meetings, and by other methods, is a factor of control indicating that the employer wants the services performed in a particular manner.
  • Especially true if the training is given periodically or at frequent intervals.
  • An independent contractor ordinarily uses his or her own methods and receives no training beyond basic information/ orientation sessions from the University.
  • An independent contractor is not required to attend meetings or training programs.
  • If the individual’s services are an integral part of the University’s operations, it generally indicates an employer/employee relationship.
  • If the performance of service establishes or affects the firm’s/individual’s own business reputation and not the business reputation of the University, it indicates independent contractor relationship.
Services Rendered Personally
  • If the services must be rendered personally, it indicates the University is interested in the methods, as well as the results.
  • An individual’s right to substitute another’s services without the University’s knowledge suggests the existence of an independent contractor relationship.
Hiring Employees
  • If the University hires other employees to assist the worker, anindependent contractorclassification is not appropriate.
  • An independent contractormay hire, supervise, and pay his/her own employees to enable him/her to meet the terms of the contract.
Continuing Relationship
  • A continuing or recurring relationship between an individual and the University likely indicates an employer/employee relationship.
  • The relationship between anindependent contractorand the University ends when the job is finished.
Work Hours/Work Schedule
  • Controlling, or the authority to control, the work hours/work schedule indicates an employer/employee.
  • An employee’s pay is tied to the number of hours required to perform the work.
  • Anindependent contractorcontrols his or her own time.
  • The rate of pay, determined in the contract, is not generally increased or decreased by the amount of time theindependent contractormust work to complete the project.
Place of Work
  • A requirement that the work be performed on the University’s premises, or at a location designated by the University, implies an employer/employee relationship, especially where the work is of such a nature that it could be done elsewhere.
  • For example, the use of University office space, telephone and clerical services generally places the worker within the University’s direction and supervision.
  • The importance of this factor depends on the nature of the service involved and the authority the University has to control the work.
  • Doing work away from the University’s premises when it could be done on site may indicate a lack of control.
  • Anindependent contractorwill generally have an established business site.
Sequence of Work
  • If a person must perform services in the order or sequence set by the University, it shows that the worker is not free to follow an independent pattern of work, but must follow the established routines and schedules.
  • Control is sufficiently shown, if the University retains the right to do so.
  • If the University is not interested in the order or sequence by which the individual completes the work, there is an indication that there is a lack of control over the manner and means by which the work is performed.
  • The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
  • Anindependent contractoris not required to file reports which constitute a review of his or her work. However, reports related only to an end result is not an indication of employment or independence.
  • Payment by the hour, week, or month represents an employer/employee relationship.
  • Payment by the job which includes a lump sum computed by the number of hours required to do the job at a fixed rate per hour may indicate to the IRS an employee/employer relationship.
  • Payment of a flat fee is customary where the worker is an independent contractor.
  • Payment or reimbursement of the worker’s business and travel expenses by the University may indicate an employer/employee relationship.
  • A person who is paid on a job basis and who has to take care of all or some incidental expenses is generally an independent contractor.
  • Providing any necessary facilities/equipment by the University tends to indicate an employment relationship.
  • Facilities include, generally, equipment or premises necessary for the work but not the tools, instruments, clothing, etc., that are commonly provided by employees in their particular trade.
  • A significant investment by the worker in order to perform the service tends to show an independent status.
  • In order to be significant, the investment must be real, essential, and adequate.
Profit or Loss
  • Employees receive compensation based on the duration of time required to do the work. Thus, they do not suffer a financial loss and are restricted from earning a profit by performing the work.
  • The possibility of a profit or loss for the worker as a result of these services generally showsindependent contractorstatus.
  • Whether a profit is realized or loss suffered generally depends on management decisions: that is, the one responsible for a profit or loss can use his or her own ingenuity, initiative, and judgment in conducting the business or enterprise.
  • Anindependent contractortypically can invest significant amounts of time/capital in his/her work without any guarantee of profit.
Services Available to the Public
  • A person may work for a number of people or firms but is considered a University employee if the University has the right to control and direct his/her work.
  • Anindependent contractoris generally free to seek other clients.
  • Demonstrated by advertisements, a visible business location and availability.
Right to Fire
  • If the University has the right to discipline or discharge an individual, that worker is considered an employee.
  • Anindependent contractorcannot be discharged as long as he/she produces a result that measures up to the contract specifications. However, the relationship can be terminated with liability as provided in the specific agreement.
Right to Quit
  • The right to quit at any time without incurring liability indicates an employer/employee relationship.
  • Anindependent contractorusually agrees to complete a specific job and he or she is responsible for its satisfactory completion or is legally obligated to make good for failure to complete the job.
  • Terminating a contract may impose a liability on the University.
Part Time or Temporary Work
  • The fact that the work is part time or of a short duration does not necessarily support an IC/C classification.
  • Other factors, such as the extent to which the services are available to the public and the authority to control the work should be considered here.

COURT CASES & IRS RULINGS (Source: University of Washington Tax Office)


  • Chester C. Hand, Sr., 16 TC 1410: In denying a taxpayer certain deductions, the Tax Court found that a teacher in the Chicago Public Schools (who was also a licensed CPA) teaching night courses at DePaul University was an employee of both the Public Board of Education and DePaul University. The Tax Court does not go into great detail in addressing what factors led to the finding that the taxpayer was an employee, but does indicate that one factor in reaching this conclusion was the taxpayer’s lack of clients as an independent entity.

  • Richard G. Newhouse, et ux. v. Commissioner, TC Summary Opinion 2002-18: In denying several deductions, the Tax Court found that an individual who had rendered services to four separate junior colleges as a part time professor (and separately, to Safeway, Inc.) was an employee of all four junior colleges. The court focused on the junior colleges’ right to control the professor’s work, noting that for professional services (such as teaching), the degree of control required to find that an individual is less than that required where other services are rendered. The Court also noted that the colleges, not the professor, had invested in the facilities to provide the courses; the professor’s pay was fixed, eliminating the possibility of profit or loss on the contract; the work performed was an integral part of the colleges’ business; two of the colleges had provided employee benefits to the professor; and the colleges had issued the professor forms W-2, indicating that they believed the professor to be their employee.

Executive Education

  • Reece, TC Memo 1992-335: In a memorandum opinion, the Tax Court found that an individual providing continuing education seminars under a per-semester contract with a University’s Department of Executive Education was an independent contractor, despite the individual’s role as a professor at the University for other purposes. The Tax Court focused on the relative lack of control over the content of the content of the seminars (noting that in the context of university teaching activities, the lack of control over course content often will not be sufficient to find that the individual was an independent contractor), the fact that the university considered the activity outside compensation under policies governing faculty conduct, the fact that that the professor was retained separately each semester, and that the professor had seminar clients other than the univeristy. The Tax Court also noted the similarity between the relationship between that of the professor and the institution and those entered into between the institution and other, completely independent parties.

  • Pulver v. Comm’r TCM 1982-437: The taxpayer was both an employee and an independent contractor with regard to organization for whom taxpayer performed services. Taxpayer was employed as chief engineer with the organization and also designed inventions which he was required to offer to the organization if within the organization’s industry. Despite the fact that because the taxpayer engaged in professional services work, for which the organization would only be required to exercise minimal control to result in a finding of employment, the court focused on the fact that the taxpayer was not subject to supervision, control, or deadlines by the organization in his inventing activities, the organization retained other independent contractors to develop inventions, and taxpayer’s inventions did not relate exclusively to the organization’s industry.


  • Revenue Ruling 55-206, 1955-1 CB 485: The IRS found that an individual engaged in the business of private tutoring as an independent contractor, who also rendered services as a substitute teacher, was an employee when engaged in substitute teaching. The IRS does not go into great detail, but finds that the individual was subject to sufficient direction and control as a substitute teacher to merit a finding that the individual was an employee. The IRS distinguishes the taxpayer’s services as a private tutor as constituting a separate trade or business which do not influence the determination with regard to whether the individual was an employee or independent contractor when rendering services as a substitute teacher.

  • Revenue Ruling 70-338, 1970-1 CB 200: The IRS found that music teachers who taught regularly at a music conservatory were employees, while those who merely gave private lessons in exchange for a percentage of the gross receipts were independent contractors. In reaching this conclusion, the IRS focused on the conservatory’s ability to exercise control over the teachers who taught regular courses, the relative lack of control over those giving private lessons with regard to their methods, the limited- duration contracts with those teachers giving private lessons, and the fact that those teaching private lessons could control the acceptance, refusal, dismissal of students (and refund of any student fees). Although it is not explicitly stated, it is clear that some weight was given to the fact that those teaching private lessons had significant opportunity for profit or loss, as their income was based on a percentage of gross revenue collected by the conservatory on their behalf.

  • Rev. Rul. 70-363, 1970-2 CB 207: The IRS found that attorneys who were retained by a law school to teach courses were employees of the law school. In finding that the attorneys were employed by the law school, the IRS focused on the law school’s ability to control both the course content and attorneys’ conduct, finding that the law school could control and direct the means by which the attorneys’ accomplished the teaching which they were engaged in. The IRS distinguished the attorneys’ separate business endeavors as practicing attorneys from their provision of instruction at the law school (which, as noted above the IRS found was not a separate business).

  • Rev. Rul. 87-41, 1987-1 CB 296: The “20 factor” test Revenue Ruling. Although the IRS has moved away from explicitly using the 20 factor test, the factors are derived from a number of cases, and are still useful in understanding the analytical framework under which employee/independent contractor determinations are made. The 20 factors are:

    1. The right to instruct the worker;
    2. The provision of training to the worker;
    3. The degree of integration of the worker’s services into the organization’s business activities;
    4. A requirement that services be rendered personally (by the particular individual);
    5. The worker’s right to hire, supervise, and/or pay assistants;
    6. A continuing relationship between the parties;
    7. Requiring the worker to keep set hours;
    8. Requiring the worker to work full-time;
    9. Requiring that work be done on the employer’s premises;
    10. Requiring the worker to perform tasks or work in a particular order or sequence;
    11. Requiring the worker to provide oral or written reports;
    12. Making payments based on a set interval (hourly, weekly, monthly, etc.);
    13. Payment of business/travel expenses;
    14. Providing the worker with tools and/or materials required to perform the work;
    15. Whether the worker has made a significant investment in facilities, equipment, or material required to perform the work;
    16. Whether the worker has the ability to make a profit or realize a loss from the contract entered into with the organization;
    17. Whether the worker works for more than one organization at a time;
    18. Whether the worker makes the worker’s services available to the general public on a regular and consistent basis;
    19. Whether the organization has the right to discharge the worker (for other than failure to meet contract specifications);
    20. The worker’s right to terminate the worker’s relationship with the organization at any time without incurring a penalty for failure to perform under the worker’s contract with the organization

    Each of these factors are relevant in assessing whether the organization has the type of control over the worker that would indicate the type of control present in an employer/employee relationship.

  • PLR 9825017: A literacy instructor was held to be an employee of an institution for which the instructor performed services. The institution had the right to terminate the worker at any time without liability, the worker had made no significant investment in the business, and the worker neither advertises the services nor performs them for others. In ruling that the literary instructor was the institution’s employee, the IRS reviewed the factors in determining whether a worker under the common law control test is an employee or an independent contractor and concluded that the institution exercised sufficient control for the instructor to be considered an employee.

  • PLR 9821053: A teacher, who taught English as a second language for three hours, three nights per week, was an employee of a school district where the teacher was required to instruct courses personally, was provided with instructions regarding teaching the courses, was observed and evaluated by the school’s vice principal, had no significant investment in the business of teaching, was paid on a regular basis and could not incur a profit or loss, and the school had treated the instructor as an employee prior to a certain date (after which, the individual was treated as an independent contractor, despite performing the same duties). In finding that the instructor was an employee, the IRS reviewed the 20 factors laid out in Rev. Rul. 87-41, and although the reasoning is not explicitly stated, the IRS appears to have considered the worker to have clearly been an employee.

  • PLR 9814011: An individual hired by a federal agency to tutor children of personnel enrolled in an after- school tutoring program was an employee of the federal agency. The individual was provided with significant instructions regarding when and how to accomplish the tutoring services, the federal agency provided all facilities, any substitute teachers were required to be approved by the federal agency, the tutor provided reports to the agency on a weekly basis, and the tutor did not perform a similar service for others or hold himself out as being in the business of providing such services.

  • PLR 9735027: Individuals who worked under a “fellowship” with a federal agency to instruct teachers of English as a second language under a grant were held to be employees. The grant provided funding for travel, living, housing, books, insurance and other miscellaneous expenses. In finding that the individuals were employees, the IRS focused on the mandatory trainings the individuals were required to attend, the fact that the workers were required to be rendered personally and were a core part of the federal agency’s mission, that the workers were subject to direction with regard to the methods used, that the workers could not make a profit or loss as a result of their services, and had no financial investment in the business of teaching.

  • PLRs 9612016, 9612020, 9612021, 9612022: The IRS found that instructors at state-affiliated institutions of higher education were employees of the institution. The IRS focused on the institution’s right to provide guidance to the workers on how the work was to be done and the methods to be used, the institution’s right to supervise the workers, that the worker is expected to perform services personally, and that the worker performs services under the institution’s name. The IRS found that these workers were employees despite the fact that the institution did not provide training to the workers, the services were provided on a part-time basis, the worker had a financial investment in a business, performs similar services to other organizations, and some workers had business licenses. Ultimately, the IRS found that the factors present indicated that the institution had sufficient control over the workers.

  • PLR 9216021: Students at a private university that participated in an “internship” program under which they served as substitute teachers for area schools and received free tuition, books, and a stipend, were employees of the institution. The IRS focused on a training seminar provided by the institution and instructions given by the local school’s principal, that they were required to render services personally, keep certain set hours of work, and had neither a significant investment in teaching, nor could they realize a profit or loss from their services. The IRS found that although the student interns performed their services at the public schools, rather than at the university, they were employees of the university for federal tax purposes.

  • PLR 9131030: Workers who performed counseling/daycare services at a school affiliated with a 501(c)(3) hospital were employees, according to the IRS. This PLR addresses many of the 20 factors listed in Revenue Ruling 87-41 in coming to the conclusion. Several of the major factors which led the IRS to conclude that these workers were employees included the degree of instruction and training provided to the workers, that the workers performed services which were an integral part of the school’s business, and that services were required to be rendered personally, on a substantially full time basis.

  • PLR 9123010: Despite working for multiple organizations, engagement on a short-term, performance-by-performance basis, and the worker maintaining a separate business and advertising to the public, the IRS found that the worker (a bassoonist) was an employee of an orchestra because he was required to attend performances personally and on time, was subject to some instruction as part of the orchestra, and the orchestra retained the right to both change the methods used and/or discharge the worker at any time. Although the specific situation is not directly relevant to teaching relationships, the framework—that despite several factors pointing toward independent contractor treatment, a worker can be reclassified as an employee if the IRS finds that the organization exercised even a small degree of control over the worker’s performance.

  • PLR 9105007: Part time instructors at a state college were employees despite a unique set of facts in which the instructors were subject to substantially less control than typical college or university instructors. The instructors had full time jobs elsewhere and typically taught one class for the College during a semester. Instructors were paid a lump sum for teaching a course, half of which was paid at the midpoint of the semester and half of which was paid at the end of the semester. The IRS noted that for professional employees, the degree of control necessary to find that a worker is an employee is less than for other types of workers. In this case, the IRS found that despite the fact that instructors retained substantial control over the course content and structure, because the college retained the right to review course objectives and course instruction was a core service provided by the institution, the college retained the minimal amount of control necessary to find that the workers were the college’s employees.

  • PLR 8925001: A number of adjunct faculty members at an institution of higher education were employees of the institution. Despite minimal control by the institution over the adjust faculty members’ activities, differences in compensation between regular faculty and adjunct faculty, and engagement in a separate trade or business by certain adjunct faculty, the IRS found that these workers were employees. In this PLR, the workers’ outside businesses (as attorneys) were distinguished as not being related to their teaching activities, and the IRS emphasized that because teaching was an integral part of the institution’s business and the adjunct faculty were professional employees, a minimal level of instruction and supervision was needed to find that they were subject to the level of control required to find that they were employees.

  • PLR 8801019: Dance instructors retained by a dance studio were employees of the dance studio because the services provided are an integral part of the dance studio’s business, instructors are required to render services personally, there is a continuous relationship with the dance studio, and compensation is based on an hourly rate with no unreimbursed business expenses incurred by the instructors.

  • PLR 8728022: An art instructor who provided similar services to the general public was an employee of a college. The IRS found that the art course was part of the college’s core business, the worker was not engaged in an independent profession (despite spending less than 25% of the instructor’s time at the college and performing similar services for others), and the university accepted payment for the courses from students, provided the space in which the instructors taught, and paid the instructor a set salary.


  • Revenue Ruling 55-583, 1955-2 CB 405: The IRS found that payment to a professor who was released from certain teaching duties to allow the professor to perform research duties under a grant to which the university which employed the professor had assigned to the professor. The IRS indicated that while the university only had very general control over the manner of the work to be performed (the professor developed the methodology and protocols for performing the research), the university had retained sufficient control over the professor’s work to constitute employment. The IRS also found that a stenographer who the professor hired was an employee of the university.


  • PLR 8937039: Psychologists with their own practices who also provided similar services (in their capacity as psychologists) for an organization which provided psychological services were employees of the organization with regard to the services provided for the organization. The IRS found that despite the fact that the psychologists were engaged in their own private practice, when working on behalf of the organization, they were subject to a sufficient degree of control, were required to render services personally, on the organization’s premises, and the services constituted an integral part of the organization’s business. The IRS emphasized that with regard to professional services, the degree of control necessary to find that a worker is an employee, rather than an independent contractor, is less than that required for other types of employees—and, despite the fact that the psychologists were subject to minimal control and supervision, general instructions regarding organizational standards and procedures were to be performed were sufficient to find that they were employees.


  • PLR 8803041: A PhD student who received a grant from a local government agency to perform certain research was not required to treat the grant as income under §61 of the Internal Revenue Code, and was instead able to exclude the amount from income under §117 as a qualified scholarship. The IRS found that this payment was excludible from income because the research required under the grant was not in excess of that required to satisfy the student’s requirements to obtain a PhD, the student and the student’s advisor determined the topic of research, the student had not performed past services for the grantor, nor was there an expectation that the student would perform services for the grantor in the future, and the grantor had no control over the manner in which the student conducted the research.

Significance of IRS Rulings

The relative significance of the rulings cited in the above examples varies, as follows:

  • Private Letter Rulings: Apply only to the parties involved and the particular set of facts covered. Although the IRS is not bound by these Rulings when dealing with a party other than the one to whom the Ruling was addressed, such Rulings are an indication of how the IRS may be likely to treat similar transactions or activities.
  • Revenue Rulings: Represent the official policy of the IRS; however, the courts generally do not recognize Revenue Rulings as having the force of law.

Since it is unlikely that all aspects of a particular ruling will be applicable in every case, each employee/independent contractor determination must be made on a facts and circumstances basis.

IRS Penalties

If an employer treats services performed by an employee as though they were performed by a non-employee, the IRS penalty assessments against the employer could include the following:

  • Penalty for Improper Classification (I.R.C. Section 3509, Determination of Employer's Liability for Certain Employment Taxes)

The general rule is that the employer is liable for all the taxes the employer would have owed and all the taxes the employer should have withheld from the employee and paid to the government. However, Section 3509 provides for less severe consequences:

The rate for failure to withhold income tax is 1.5% of the wages, doubled to 3% if the employer failed to file Form 1099 for the misclassified independent contractor;

The employer remains liable for its share of FICA and for 20% of the employee’s unpaid FICA taxes, doubled to 40% if the employer failed to issue Form 1099.

  • Penalty for Failure to File Returns (I.R.C. Section 6651(a)(1), Failure to File Tax Return or to Pay Tax)

A 5% penalty for failure to file applies when an employer fails to file a return on the due date and there is a tax due. The penalty is based on the amount required to be shown on the return minus any part of the tax that was paid on or before the due date. Another 5% penalty is charged for each additional month, or fraction thereof, during which the failure continues; however, the penalty may not exceed 25% in the aggregate.

  • Penalty for Willful Failure to Collect Tax

A penalty, equal to 100% of what the contractor should have paid in taxes, for an employer's willful failure to withhold from a non-corporate independent contractor's pay, if the contractor failed to pay income taxes.

Section 530 Safe Harbor Defense

Safe Harbor Rules

The safe harbor rules of Section 530 of the Revenue Act of 1978 (and subsequent modifications) provide employers with relief from the taxes and penalties detailed in Sections VI., Misclassification of Workers and VII.F., IRS Penalties, above. Under these rules, an individual will be deemed not to be an employee for purposes of income and employment taxes if all three of the following conditions are met:

  • The employer had a reasonable basis for treating the worker as an independent contractor;

Evidence of reasonable basis:

  • Reliance on federal tax court decisions.
  • Reliance on prior IRS audit results.
  • Reliance on IRS rulings to the University.

Other reasonable basis:

  • The employer treated workers performing similar services as independent contractors; and
  • All Federal tax returns filed by the employer have consistently treated the independent contractor and all workers in similar positions as independent contractors.

An employer has a reasonable basis for not treating a worker as an employee if it relied on any of the following:

  • Judicial precedent, published rulings, technical advice or a letter ruling issued to the employer;
  • A past IRS audit of the employer in which the IRS did not assess employment tax deficiencies for amounts paid to individuals holding positions substantially similar to the position held by the worker whose status is being questioned; or
  • Long-standing recognized practice of a significant segment of the industry in which the worker is engaged, i.e., 25% or more of an industry for 10 years.

Even if an employer is unable to satisfy any of the above three requirements, the reasonable basis requirement may be met by demonstrating, in any manner, a reasonable basis for not treating the worker as an employee.

Applicability of Section 530 to the University

Due to the fact that there are conflicting rulings regarding the applicability of Section 530 to government agencies and instrumentalities, there is some uncertainty as to whether Section 530 relief is available to a governmental entity such as the University.


Understanding Employee vs. Contractor Designation

IRS Publication 1779 - Independent Contractor or Employee?

Tax Topic 762