Determining whether an individual should be hired as an employee or an independent contractor can be challenging. Classifying a worker correctly is critical to preventing the imposition of penalties by the IRS and other non-tax considerations. If a worker has been misclassified, the Internal Revenue Service can reclassify the individual and the reclassfication could result in the department being liable for taxes, penalties, and interest. In order reduce this risk, the University of Washington has developed several guidelines for ensuring employees are correctly classified.
In general, for an individual to be classified as an independent contractor, the individual:
- Should not have been a University of Washington employee within the past calendar year;
- Must not be considered an employee under the "Common Law Control" test; and
- If the individual was a University of Washington employee in the past, should not be hired to perform similar tasks or work as an independent contractor
Although there may be exceptions to this general rule, such exceptions are rare, and must be reviewed by the University Tax Office. The University expects that departments will adhere to the Administrative Policy on determining whether an individual should be hired as an employee or as an independent contractor. An individual must be properly characterized before a contract is signed and before payment is made.
The University of Washington Tax Office has developed guidance regarding common employee/independent contractor determinations unique to higher education. This guidance may be helpful in determining whether
Responsibility for Initial Determination of the Classification
Departments are responsible for the initial classification of an individual as an employee or an independent contractor. There are three types of control that must be considered in making the determination.
- Behavioral: Does the UW control or have the right to control when, where, and/or how the individual does his or her job?
- Financial: Does the indivdual have a bona fide business and business relationship with UW, or is the individual financially dependent on the University for his/her livelihood?
- Type of Relationship: Does the work involve teaching courses or performing sponsored research on behalf of the institution? Is the individual being provided employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Is relationship intended to last for a set period of time, or indefinitely? Have the parties entered into a written contract defining their relationship as one of employee/employer or independent contractor?
Departments should weigh all of these factors when determining whether an individual should be classified as an employee or independent contractor. In determining whether an individual is an employee or an independent contractor, no single factor is determinative and the relationship must be analyzed as a whole. However, where an individual performs teaching or research on behalf of an institution or higher education, or performs substantially similar duties as those performed by that individual as an employee, the individual is extremely likely to be considered an employee by the IRS and the courts.
Form 1632 may be helpful in determining whether an employee should be treated as an employee or an independent contractor. Once the determination regarding employee or independent contractor status has been made, the individual should be paid through either Accounts Payable (independent contractor) or Payroll (employees).