IS-2516 Independent Contractor Status Determination (Policy)
Administration
Release Date: 11/09/00
Revision 1: 06/06/02
Revision 2: 05/09/06
Revision 3: 02/19/20
Policy
Administrative Directive
The independent contractor status determination is a process that ascertains whether services are being provided by an independent contractor or an employee. The administrative directive contains information regarding types of services and employee status, the relationship between Central New Mexico Community College (CNM) and the potential independent contractor or employee, and the three categories the Internal Revenue Service now emphasizes when auditing independent contractor relationships. The procedure document provides the steps necessary to complete and submit an Independent Contractor Determination form along with other considerations in determining a workers status.
CNM is mandated by the federal government, under the direction of the Internal Revenue Service, to determine if a worker providing services is an independent contractor or an employee for tax status purposes. Misclassification of individuals as independent contractors, which avoids withholding payroll taxes, is not in conformance with the Internal Revenue Code and may result in substantial tax liabilities, penalties and interest expenses. The process for determining employee status relies on consideration of significant factors that require careful evaluation by those involved in the determination process.
Three basic components need to be considered when determining whether a worker is an employee or an independent contractor: types of services, economic reality factors, and IRS criteria.
Types of Services
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Economic Reality FactorsBasic common law factors that assist in distinguishing an independent contractor from an employee |
IRS CriteriaFinancial Control (Independent Contractor Determination Form) |
1.1 Determination of employee status involves a complex determination process that may require consultation with the Purchasing or Human Resources Departments.
1.2 CNM employees retain their status of employee regardless of expanded duties such as working as instructors for the Workforce Training Center or the Emeritus Academy.
1.2.1 Expansion of duties for employee groups are subject to different policies depending on employee classifications:
Full-time staff:
Exempt - Expansion of duties allowed with supervisor approval
Non-Exempt - Expansion of duties allowed with supervisory approval and understanding of Fair Labor Standards Act (FLSA) overtime considerations
Full-time Instructors:
Expansion of duties allowed within the restrictions, exceptions, and dictates of Collective Bargaining Agreement
Part-time staff:
Exempt - Expansion of duties allowed with supervisor approval
Non-Exempt - Expansion of duties allowed with supervisor approval and understanding of FLSA overtime considerations
Part-time Instructors:
Expansion of duties allowed but all changes must comply with Collective Bargaining Agreement specifications
1.3 Employees who have terminated service with CNM can be hired as independent contractors, but hiring restrictions are specifically outlined in the New Mexico State Statutes and are interpreted by the Purchasing Department Director for each individual case.
2. Evaluation of Types of Services
In the process of deciding whether to complete an Independent Contractor Determination Form, the requester must often make the distinction between ancillary versus professional, personal and contract training/instructional services. All instructional and non-instructional-related services in excess of $1000 require the completion of an Independent Contractor Determination Form.
2.1 Ancillary Versus Professional, Personal and Contract Training/Instructional Services
2.1.1 Ancillary services generally include jobs such as equipment repair maintenance contracts, and film developing and processing. Ancillary services that are not available through CNM do not generally require completion of a Independent Contractor Determination Form unless those services are ongoing.
Ancillary services are ordered through completion of a Departmental Purchase Order (DPO), if the amount of the service is $2,000 or less (IS-1810). If the amount of the service exceeds $2,000, then the requester must complete a Purchase Requisition (PR) to submit to the Business Office (IS-1808).
It is important to note that if the service is continuing, or ongoing, the status of the ancillary service requires completion of an Independent Contractor Determination Form.
2.1.2 Professional services require completion of a Independent Contractor Determination Form and include services such as architects, landscape architects, engineers, surveyors, medical arts practitioners, scientists, management and systems analysts, certified public accountants, lawyers, psychologists, planners, researchers, lobbyists, labor negotiation consultants and persons or businesses providing similar services (Governing Board Policy).
2.1.3 Personal services fall outside of ancillary and professional services and may involve the furnishing or labor, time or effort by a contractor not involving the delivery of a specific end product other than reports and other materials, which are merely incidental to the required performance. Such services may include the furnishing of insurance, speakers, entertainers, court reporters, grant writers, and publishers. Personal services require completion of an Independent Contractor Determination Form.
2.1.4 Contract training/instructional services provide structured learning that often contains specialized content considerations offered in alternative formats. Contract training/instructional services requires completion of an Independent Contractor Determination Form unless the worker is currently an employee of CNM, which requires a continued designation of employee.
3. Economic Reality of the Relationship
3.1 In the process of contracting work, CNM must determine the status of probable independent contractors by referring to common law factors that distinguish a contractor from an employee. When completing the Independent Contractors Determination Form, it is helpful to review this list which includes common law factors that the IRS focuses on to make its determination of the economic reality of the relationship.
(1) Degree of control exercised by CNM over the details of work
(2) Degree to which the worker offers similar services to the general public
(3) Workers involvement in the regular operations of the department
(4) Permanency of the relationship
(5) Workers investment in the facilities, tools, or materials used in the work
(6) Workers opportunity to realize a profit or loss
(7) CNMs right to discharge the worker
4. Independent Contractor Status Determination Based on IRS Criteria
4.1 The requester of ongoing services must complete an Independent Contractor Determination Form that is designed to provide the requester and control agent with information used to assess the status of workers hired by CNM.
4.2 The contents of the Independent Contractor Determination Form are based on common law factors currently used by the Internal Revenue Service to determine independent contractor status. The three categories include: financial control, behavioral control, and the relationship of the parties.
Financial Control
This factor focuses on whether there is a right to direct or control how the business aspects of the workers activities are conducted. Whether the worker has made a significant investment in the business, has unreimbursed expenses, makes services available to the relevant market, and has the opportunity for profit or loss are factors relevant to financial control, as is the method of payment.
All independent contractors incur an array of business expenses, make their services available to the public, receive a flat fee, and realize a profit of loss. A worker's significant investment in equipment or facilities is a good indicator of independent contractor status.
Behavioral Control
This factor focuses on whether CNM has a right to direct or control how the work is done. The presence or absence of instructions and training on how work is to be done is especially relevant.
CNM's giving instructions, providing training and using evaluation systems are strong evidence of the right to control a worker and support the conclusions that the worker is an employee.
Relationship of Parties
This factor focuses on how the parties perceive their relationship. Intent of parties/written contract, employee benefits, discharge/termination, permanency and regular business activity are relevant to how the parties perceive their relationship.
The IRS concludes that if the employer and the worker intended to create an independent contractor relationship, the employer will have little right to control the worker. Written service agreements, no employee benefits, limited duration of the relationships and performing key services are indicators of an independent contractor relationship.
4.3 The amount of information supplied by the requester on the Independent Contractor Status Determination Form will depend on whether a specific individual or company has been identified. The requester should complete as much of the form as possible to assist in assessing the independent contractor versus the employee status of the individual or firm being considered. The requester should also include any other documentation (such as quotes, plan, memos) that further assist in the determination process.
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The person who has authority to approve expenditures. |
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The tests used to determine whether an individual is economically dependent on the business where the service is being rendered, or as a matter of economic fact the person is considered a separate business. |
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A person who has their schedule determined by CNM, is an ongoing part of the business structure, is directed and controlled by CNM, and receives employee benefits. |
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A person who contracts to perform services for others, and is under the direction of another with regard to the end result, but not the way the service is performed. These individuals do not have the legal status of an employee, and unlike an employee an independent contractor pays for all expenses, social security, income taxes and receives no employee benefits. |
Forms
Support Materials:
Not Applicable
Reference Materials: