Because of the large penalties and interest that can be assessed, the IRS has been actively pursuing the issue of independent contractor vs. employee relationships. Generally, the best defense against a negative IRS determination is documentation of the considerations that led to the conclusion of independent contractor status. The IRS may not agree with the conclusion but demonstration of due diligence helps avoid the assessment of penalties.

Basic Definitions
The primary difference between an independent contractor and an employee is the level of control asserted by ISU. If ISU is controlling the actions of the worker, the worker must be treated as an employee. If the worker is merely performing a service at the request of ISU, the worker probably is an independent contractor. In addition, persons who have a bona fide "public" business are much more likely to qualify as independent contractors. ISU is required to withhold federal and state taxes and Social Security on employees. We are also required to pay the employer's share of Social Security on employees. Independent contractors, on the other hand, are responsible for their own payroll taxes.

The Three Categories of Factors
Originally, the IRS relied heavily on the 20 questions test. Recently, however, the Service has consolidated these concepts into three general categories: behavioral control, financial control, and the relationship of the parties. A description of each factor including examples follows.

Financial control: The financial control factors address ISU's right to control the business aspects of the worker's job. The presence or absence of the following factors helps to distinguish between an employee and an independent contractor.

• The extent to which the worker makes services available to the general public: An independent contractor will generally have a bona fide business with a number of clients other than ISU.
• The extent of the worker's investment in the business: Independent contractors have their own tools and equipment. If ISU is providing equipment or office space to the worker, this is indicative of an employee relationship.
• The structure of the payment for services: Regular wages for a specified period of time favor an employee classification except in professions where an hourly billing rate is industry practice such as attorneys and accountants. A flat fee is generally indicative of an independent contractor.
• The extent to which the worker can realize a profit or loss on the engagement: An independent contractor is more likely to be able to recognize a profit or loss.

Behavioral control: The key consideration is whether ISU has the retained the right to control the details of the worker's performance, indicating an employee relationship. This includes such elements as:

• The level of training provided by ISU: An independent contractor relies on their own expertise and should require little training.
• Whether ISU dictates the specific time that the work must occur: An independent contractor generally sets their own hours and is only required to perform the tasks by a given deadline or within a broad timeframe. See the Special Cases section on speakers for additional information.

Relationship between the parties: The nature of the relationship may be evidenced by:

• A written contract: The PSA agreement constitutes the contract. In situations where the independent contractor relationship is somewhat unclear but the total value of the agreement is less than $2000, voluntary use of the PSA would help support the existence of an independent contractor relationship.
• The permanency of the position: A long-term continuous relationship is indicative of an employment situation. In contrast, an independent contractor may have ISU as a client for a number of years as specific situations or tasks arise but they would not be working exclusively for ISU over a long period of time.
• The extent to which the services performed are a key aspect of the regular business of the unit: Hiring a worker to perform the same tasks that are regularly performed within the unit is generally indicative of an employee relationship. Retired employees filling in for regular staff should be paid hourly wages as employees.

Special Cases

• Instructors of for-credit coursework: The IRS considers instructors of record of for-credit coursework to be employees. They should be appointed and paid through Payroll.
• Speakers: Speakers for single-appearance or short term events are independent contractors and a PSA is not required except for a conflict of interest vendor. The determination of classification becomes less clear as the speaking engagement is extended. An established consultant might give extended training on a specific topic. Since they have a bona fide business with many consulting clients, they would qualify as an independent contractor. On the other hand, if a local business owner is hired to lead a 12-week non-credit CPA review course, other factors should be closely reviewed to determine the level of control that ISU has over the individual. Some points to consider would be whether the individual has the authority to set the establish lesson plan, select the text, and set the schedule. Another consideration might be whether the individual has performed this service for other educational entities or associations. The less control and guidance given by ISU, the more likely that an independent contractor relationship exists.
• Entertainers: Entertainers, by definition, are independent contractors and a PSA is not required except for a conflict of interest vendor.