Independent Contractor Classification
Policy Number: OTC-1
Effective Date: December 1, 2019
Review/Revision Date: Dec. 1, 2019
Policy was updated to:
- exempt from the Certification process certain limited-engagement Speakers, Artists or Performers who will be paid less than $600;
- exempt from the Certification process Game Officials who will be paid less than $600;
- reflect that the Office of Tax Compliance no longer resides within the Office of the Comptroller; and
- remove process-related details from the Policy and place them in a separate “Guidelines for Use” document.
Review/Revision Date: March 15, 2010
Original Policy was approved on this date.
Purpose and Application
Independent Contractor classification is a frequent area of audit by the Internal Revenue Service (IRS). Misclassifying an Individual Service Provider as an Independent Contractor could place the University at risk of assessment of significant amounts of taxes, interest and penalties. This Policy exists to ensure that the University consistently and fairly classifies its workers and complies with federal and state guidelines to protect the University from penalties and interest or other adverse action.
Implementation of this Policy is the responsibility of the Office of Tax Compliance, under the Office of the Executive Vice President, Treasurer and Chief Operating Officer. For inquiries regarding this Policy, please contact the Office of Tax Compliance at firstname.lastname@example.org or 215.895.6880.
This Policy applies to all University trustees, officers and employees who contract for services on behalf of the University and/or any of its subsidiaries or affiliates.
This Policy governs all transactions in which Drexel University, including its subsidiaries and affiliates, including but not limited to, Drexel University Online, LLC, Academic Properties, Inc., and the Academy of Natural Sciences of Drexel University (collectively, “the University”) seeks to engage the services of an Individual Service Provider, whether it be an Individual, Sole Proprietor, or Single-Member LLC, for federal tax purposes.
Statement of Policy
Drexel University (the “University”) engages a wide range of Individual Service Providers, as defined in this Policy, who may be classified as either Independent Contractors or Employees. The University must evaluate each Individual Service Provider’s relationship to the University to ensure that they are properly classified as either an Employee or an Independent Contractor. In certain instances, an Individual Service Provider must be classified by the University as an Employee, subject to tax withholding, and may not be treated as an Independent Contractor. Federal and state laws govern when an Employee-Employer relationship exists in the workplace. This policy and associated guidelines outline in general terms the factors that are used (primarily by the IRS) to make the determination of whether an individual is appropriately classified as an Independent Contractor or as an Employee. Generally, employers who are found to have misclassified an Individual as an Independent Contractor, when, in fact they should have been designated as an Employee are subject to having to pay unpaid taxes (primarily payroll tax), interest, and significant penalties under the law. This policy, therefore, provides information and guidance to University personnel on how to properly provide information to Drexel units that have to make these determinations about classification.
B. Certification for Determination of Independent Contractor Status
The Certification for Determination of Independent Contractor Status form (“the Certification”) must be completed when the University seeks to engage the services of an Individual Service Provider, whether it be an Individual, Sole Proprietor or Single-Member Limited Liability Company. The Certification process gathers the information needed to accurately classify an Individual Service Provider as either an Independent Contractor or an Employee. This information is retained as support for classification that could be used if the University were audited by the IRS or other federal or state department. Entities taxed as corporations, partnerships, S corporations, or 501(c)(3) tax-exempt entities are not required to complete the Certification process. If the Service Provider is a partnership or a corporation rather than an individual, in most cases the Service Provider will be considered by the IRS to be an Independent Contractor. Other exceptions are detailed in Section C of this Policy.
The Certification must be satisfactorily completed by every Individual Service Provider and reviewed and signed off by the University Employee responsible for contracting the services, as well as the supervisor of the University Employee, each attesting to the completeness and accuracy of the Certification, prior to the performance of any services for the University. Please note, however, that the Certification is not a contract to perform the services. The supervisor of the University Employee must have authority to approve the purchase. In addition, the fully completed Certification must be reviewed and approved by the Office of Tax Compliance to confirm that the information provided demonstrates that the Individual Service Provider meets the requirements for classification as an Independent Contractor. Submit the Certification to the Office of Tax Compliance at email@example.com.
Except in certain situations outlined in Section C of this Policy, no payments will be made to Individual Service Providers before a properly completed Certification has been approved by the Office of Tax Compliance.
Except as described in this paragraph, the Office of Tax Compliance will not require a new Certification for each subsequent payment to an Individual Service Provider within one year of initial Certification; however, the University requires a new Certification on an annual basis. It is the responsibility of the University Employee contracting for the services to obtain and submit a new Certification annually. If there is a significant change to the nature of the service(s) provided or to the Individual Service Provider’s relationship with the University, a new Certification must be submitted.
All supporting documentation referenced in this Policy must be completed and signed before services are rendered by the Individual Service Provider and before a contract is prepared for the services. In the event that an auditing body (e.g., the IRS or some other federal or state department or agency) determines that Employee status should have applied to an Individual Service Provider, all taxes, penalties and interest assessed against the University will be charged to the contracting school/department/unit.
Please refer to the Guidelines for Use – Independent Contractor Classification for step-by-step instructions on the Certification process.
C. Exceptions to Requirement to Complete Certification
- Certain Speakers, Artists and Performers
Payments to limited-engagement Speakers, Artists or Performers who are eligible to use and are engaged using the Speaker, Artist or Performer Agreement and will be paid less than $600 are not required to complete the Certification. For instructions on hiring and processing payments for these types of providers, please visit the Procurement Services website.
- Game Officials
Payments to Game Officials who are eligible to use and are engaged using the Game Official Agreement and will be paid less than $600 are not required to complete the Certification.
D. Classification of Individual Service Providers as Employees or Independent Contractors
The determination of whether an Individual Service Provider is an Employee or an Independent Contractor depends upon the facts and circumstances of each situation. In general, the more control the University has over a Service Provider, the more likely it is that the Service Provider is an Employee rather than an Independent Contractor. Facts that provide evidence of the degree of control and independence fall into three general categories: behavioral control, financial control, and the nature of the relationship between the parties. This Policy does not purport to provide all of the applicable “tests” or “factors” that go into determining an appropriate “classification.” Indeed, the determination is very fact specific.
Please refer to related Guidelines for Use for an expanded discussion of factors provided for illustrative purposes to assist with gathering information that will be used to make the determination on a good-faith basis.
E. Special Situations
- Current or Former Employees, Including Retirees
Under IRS rules, in most cases where the Individual Service Provider is currently a University Employee or has been an Employee during the current calendar year and is to be engaged as paid for work outside their normal duties, the IRS may consider the Service Provider an Employee. The information provided on the Certification must justify treating an Employee/Service Provider as an Independent Contractor and must be approved by the Office of Tax Compliance prior to the performance of services. Where necessary, the Office of Tax Compliance will require the contracting Employee to provide additional details about the nature of the engagement for purposes of determining such status. To substantiate the University’s determination in the event of an inquiry by the IRS, such authorization will be given only if it can be clearly demonstrated that the Service Provider is performing duties that are fundamentally different from those regularly performed in their capacity as an Employee. If the Individual Service Provider has been an Employee of the University in a prior calendar year, particular care must be given to evaluating the information provided on the Certification regarding the individual’s status.
As a general rule, students who provide services to the University will most often be appropriately characterized as Employees, not as Independent Contractors. Due to immigration as well as tax considerations, international students cannot be characterized as Independent Contractors and must be classified as Employees.
- Services Performed Outside of Pennsylvania
If an Individual Service Provider will be performing services outside of Pennsylvania, the Individual Service Provider must qualify for independent contractor status as mandated by the IRS, Pennsylvania, and the state in which they will perform services. Additional review may be required for Individual Service Providers performing services outside of Pennsylvania.
- Services Performed Outside of the United States
When engaging an Individual Service Provider to perform work outside of the United States, an Individual Service Provider must qualify for independent contractor status in both the United States and host country, as an Individual Service Provider could be reclassified by either country’s legislation.
- Foreign Individual Service Providers Performing Services in the United States
Special rules apply to Foreign Individual Service Providers. Departments contracting with Foreign Individual Service Providers must contact the Office of Tax Compliance in advance of the engagement at firstname.lastname@example.org or 215.895.6880.
- Amounts Paid for Instruction or Course Development
As a general rule, Individual Service Providers providing academic instruction or course development will be characterized as Employees.
F. Violation of Policy
Violation of this Policy and/or failure to timely cooperate in complying with its provisions by any individuals who contracts for services on behalf of the University may result in disciplinary action up to and including dismissal.
Keywords and Definitions
- Artist: An individual, or unincorporated group of individuals, engaged to perform for the University community. Ex: Actor, musician, vocalist, singer, live art.
- Employee: An individual who performs services where the payer controls what will be done and how it will be done.
- Independent Contractor: A self-employed individual that offers its services to the general public. As a general rule, an individual is an independent contractor if the payer has the right to control or direct only the result of the work, assignment or project and not what will be done or how it will be done (e.g., the method or means of completing the work, assignment or project).
- Individual Service Provider: An outside service provider that is taxed as an individual, Sole Proprietor, or Single-Member Limited Liability Company.
- Performer: Individual or unincorporated group of individuals engaged to entertain the University community or who otherwise perform(s) limited services involving cultural or academic enrichment. Ex: Magician, dancer, comedian, DJ, specialty demonstration.
- Single-Member Limited Liability Company (SMLLC): For federal tax purposes, a limited liability company with one member.
- Sole Proprietor: A individual who solely owns an unincorporated business.
- Speaker: Non-Drexel affiliated speakers or presenters for University-sponsored programs, activities or events. Ex: Limited engagement speaker or presenter of a seminar or workshop.
- Game Official: Referee, umpire, scorekeeper, bookkeeper, or other athletics official engaged using the Game Official Contract Template.
Appendix: Related Documents, Forms and Resources