Government agencies prefer employees instead of independent contractors. It is easier and far more reliable to collect payroll taxes and income tax withholdings from employers than from independent contractors. Thus, these government agencies have stepped up their audit activities looking for companies that misclassify employees as independent contractors. In 2007, New Jersey became the first state to fully criminalize employee classification violations. Under this law, all payments for services are considered to be for an employee and the burden of proof is on the hiring manager to establish that the worker qualifies as an independent contractor. IEEE asks that its staff and volunteer Treasurers become familiar with this issue to avoid any serious consequences.
Definition of an independent contractor
An independent contractor is an individual or entity that is not affiliated with the IEEE and provides short-term or project-based professional or specialized advice or services under a written independent contractor agreement. Independent contractors are in business for themselves and receive a fixed amount for services rendered. This fixed amount includes all expenses associated with providing the service as applicable and agreed upon, i.e. travel, lodging, meals, mileage, resources/materials, copy fees, etc.
Determining a worker's independent status
Section 31.3121(d)-1(c)(2) of the IRS regulations provides that generally the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work but also as to the details and means by which the result is accomplished.
The IRS test for determining worker's employment status is called the common law test. It is the measure the IRS uses to determine whether the hiring firm has the right to control a worker on the job. The IRS has instructed its auditors to look at three areas for this determination. These are:
- behavioral control on the job;
- financial control;
- the relationship with the worker.
2. The financial control factors are those which show whether a hiring firm has a right to control a worker's financial life. A worker will more likely be considered an independent contractor if he or she: 1) has a significant investment in equipment and facilities; 2) pays business or travel expenses himself or herself; 3) makes his or her services available to the public; 4) is paid by the job; and 5) has opportunity for profit or loss (e.g. there is no opportunity for profit or loss if the worker is paid by the hour or is reimbursed for all expenses).
3. The relationship of the worker and hiring firm factors are those which show whether the hiring firm and the worker believe he or she is an independent contractor or an employee. A worker will more likely be considered an independent contractor if he or she: 1) is not provided with employee type benefits; 2) has signed an Independent Contractor Agreement with the hiring firm; 3) is hired with the expectation that the working relationship will not continue indefinitely (e.g. Independent Contractor Agreement has a definite end date); and 4) performs services that are not a part of the hiring firm's regular business activities.
Obtain required documents and approvals
Complete the following steps in the order listed:
- Service Provider Questionnaire (PDF, 160 KB): Send this to the service provider for completion. The independent contractor engagement process may not proceed without a signed Service Provider Questionnaire including any required attachments.
- Work Status Questionnaire (PDF, 227 KB): To be completed and signed by the contract manager. If the contractor will be managed by an IEEE volunteer, the responsible IEEE Staff Manager must also sign.
- Independent Contractor Agreement (DOC, 31 KB): Complete the appropriate agreement only if the responses in the Service Provider Questionnaire and the Work Status Questionnaire indicate that an independent contractor relationship exists, in light of the Analytical Factors above. The Independent Contractor Agreement should not be signed by either party until full IEEE approval has been secured.
- Tax Forms W-8 (individuals), W-8 (entities) or W-9: Ask the service provider to complete the appropriate form.
- Purchase Requisition: At least ten (10) business days before the requested start date of the contract (before the service provider starts any work), complete an iProcurement purchase requisition and attach the documents from steps 1, 2, 3 and 4.
- Approval and Signature: Once the contractor is qualified as an Independent Contractor by Strategic Sourcing and Tax Management, Strategic Sourcing staff will forward the Independent Contractor Agreement to the Contractor and appropriate staff for electronic signature. Upon receipt of both signatures, an electronic Purchase Order with the executed Agreement attached will be forwarded to the Contractor who can begin work on the requested start date or the date the agreement is signed by IEEE, whichever is later.
Contact information
Please contact the IEEE Tax Department with any questions or comments regarding independent contractors: tax-compliance@ieee.org.