Employee or Independent Contractor?
The Independence Test
Employees come and employees go. Occasionally, they come back again. Sometimes just for a specific project or for work in an entirely different school or department. In these situations, it’s ok to pay the individual via check request (1099), right? Not so fast.
The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. To view the University policy regarding employee vs. independent contractor status or if you have questions about independent contractors and the use of 1099 payments, you may contact the Tax Department or review additional information at http://tax.wustl.edu.
Typically, someone who has worked for the University and received a W-2 should continue to receive a W-2 for subsequent work. An exception may exist if the individual has established him or herself as an independent contractor (as defined by the IRS) and is performing duties that are separate and distinctly different from work done as an employee. In no case should a person be hired as a contractor in the same capacity and similar job responsibilities to those he/she had while in an employee status.
The Internal Revenue Service considers an individual an independent contractor if the person for whom the services are performed (e.g., Washington University), has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. An employee is anyone that performs services for Washington University if we can control what will be done and how it will be done. This is so even if we give the employee freedom of action. What matters is we have the right to control the details of how the services are performed.
It is critical that Washington University correctly determine whether individuals are employees or independent contractors. Generally, we must withhold income taxes, Social Security, and Medicare taxes on wages paid to an employee. We don’t have to withhold or pay any taxes on payments to independent contractors as the independent contractor is responsible for payment of self-employment taxes. If we misclassify an employee as an independent contractor we can be held liable for employment taxes that were not withheld.
The IRS has a list of 20 common law factors that determine whether an individual is an employee or independent contractor. All departments engaging independent contractors must submit evidence that a contract exists between the department and the independent contractor. This is done by completing the “Questionnaire for Determining Employee or Independent Contractor Status” available on the tax page of the University website (tax.wustl.edu in the forms section). The questionnaire for determining employee or independent contractor status should be completed and submitted to Disbursements and the Tax Department for review. The decision on whether or not this employee (or prior employee) can be paid as an independent contractor will be made in consultation with the Tax Department and will be based on the questionnaire answers and all surrounding facts and circumstances.
The following example illustrates a situation where an individual may correctly receive both a W-2 and 1099 from the University:
Example: A software engineer is employed by Washington University and he also does independent sign painting on weekends. He advertises and has many clients for his sign painting business. Washington University hires him to paint signs for a special occasion, one-time job. He quotes a flat price that is not connected to his Washington University pay. He is paid for the completed sign painting job. No one supervises his work. In this case, it would be correct for the employee/independent contractor to receive a 1099 for his sign painting servies and a W-2 for his regular employee duties.