This bulletin provides state agencies with guidance for determining if a worker is an employee or an independent contractor when intending to procure services.

Simultaneously with the issuance of this Bulletin, OSC is issuing Payroll Bulletin No. 845 to establish new procedures and to restate existing procedures for the processing of payments to individuals who are employees, for services rendered to the State.

Prior to procuring services, the agency must determine if the worker is an employee or an independent contractor.

It is critical that agencies correctly classify a worker as either an employee or an independent contractor. This classification determines the method in which the worker will be paid. 

Misclassifying a worker as an independent contractor, rather than an employee, disadvantages the worker  in that:

• For income tax purposes, the worker may be required to report payments received for his or her services as a self-employed individual, which will result in payment of more than his or her proper share of Social Security and Medicare tax liabilities (employees and employers are each required to pay an equal share of such tax liabilities, while independent contractors are required to pay both shares). 
• The worker will not receive pension plan benefits.
• The worker will not receive other employee-entitled fringe benefits (i.e. union, health insurance, deferred compensation).

In addition, misclassifying a worker as an independent contractor may subject the State to liability to the Internal Revenue Service (IRS) for unpaid employment taxes, interest and penalties.  Following these guidelines can minimize the risk of exposure to an IRS audit and resulting financial penalties to New York State if the IRS determines a worker has been misclassified as an independent contractor when the worker is actually an employee.

Conversely, misclassifying an independent contractor as an employee may result in providing benefits of employment (such as health insurance and pension benefits) to an individual who is not entitled to them, and could jeopardize the tax-favored status of benefits provided to all employees.

Before procuring services, first determine if the worker is an employee or an independent contractor. The attachments provided in this bulletin provide guidance in making the worker status determination and documenting the procedures used in accordance with IRS criteria.  If there are no material differences in the factual circumstances that apply to a group of similarly situated workers, then agencies may make and document one worker status determination for the group of workers as a whole, rather than make an individual determination for each worker. 

Attachment A - IRS guidelines for determining whether a worker is an   employee or an independent contractor.

Attachment B - Employee/Independent Contractor Status Determination Worksheet to use in conjunction with Attachments A and C.  This worksheet may be used “as is”, or as a template to create a determination form specific to your agency’s needs. 

Note: In lieu of using this worksheet, the agency may  request that the IRS determine the worker’s classification by filing IRS Form SS-8.

Attachment C - IRS Publication 963, Chapter 4, provides additional information and examples illustrating worker classifications.

When an agency determines a worker will be providing services as an independent contractor, the agency must procure the services in accordance with the State Finance Law.  The agency issues payment to an independent contractor through the Central Accounting System using a New York State Voucher.

When an agency determines a worker is an employee, the agency issues payment through the New York State Payroll System.

When an agency determines a worker will be providing services as an independent contractor, and that worker is also an employee of the state, the agency must, as required by section 73(4) of the Public Officers Law, procure such services through a competitive process.  The agency issues payments associated with the independent contractor work through the Central Accounting System using a New York State Voucher.

Develop procedures for classifying workers consistent with the IRS guidelines.

Communicate IRS and OSC policy and your agency’s procedures for proper worker classification to all business and administrative control units in your agency.

Document worker classifications. The documentation must clearly indicate the agency’s determination to classify a worker as an employee or as an independent contractor.

Maintain the documentation supporting independent contractor classifications with the procurement record for a minimum of seven (7) years. This documentation must be readily available in the event of an IRS audit or OSC review.

If you have any questions regarding this bulletin, please contact the Bureau of State Expenditures:

• Federal Reporting Unit  fedrep@osc.state.ny.us, (518) 486-4602 or
• Vendor Management Unit  vmu@osc.state.ny.us (518) 402-4003