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Date: September 25, 2008
Bulletin Number: 845
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Subject

Agency Compliance with Internal Revenue Service (IRS) Policy Regarding Worker Status Determinations

 

Purpose

To provide guidelines and procedures for determining if a worker should be treated as an independent contractor or as an employee.

 

Background

Payments for services performed by individuals who have been determined to be State employees under the guidelines contained in this Bulletin are required to be processed through the New York State Payroll System.

Payments for services performed by individuals who have been determined to be independent contractors under the guidelines contained in this Bulletin are required to be processed through the Central Accounting System using a New York State Voucher.  Each agency submitting a voucher for payment for a service provided to the State by an individual who is not currently being paid through the New York State Payroll System is responsible for documenting that the individual providing the service is an independent contractor.

Simultaneously with the issuance of this Bulletin, the Office of the State Comptroller (OSC) is issuing Procurement and Disbursement Guidelines Bulletin No. G-233 to establish new procedures and to restate existing procedures for the processing of payments for services rendered to the State by individuals who are independent contractors.

The establishment of guidelines and procedures for employee vs. independent contractor determinations can, if followed, minimize the risk of exposure to an IRS audit and subsequent financial penalties if erroneous classifications are found.

The potential tax-related liabilities for misclassifying an employee as an independent contractor include:

  • Social Security and Medicare taxes not paid
  • Other payroll taxes not withheld
  • Interest payable on money found to be owing, and
  • Possible penalties and civil fines

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

 

OSC Actions

OSC has reviewed the IRS criteria pertinent to the classifications of workers as employees or independent contractors.  Relevant information is provided in attachments to this bulletin.  The attachments are provided as guides for the development, communication, and documentation of each agency’s internal procedures for making worker status determinations.

 

Attachment A

IRS guidelines for determining whether an individual is an employee or an independent contractor.

 

Attachment B

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

 

Attachment C

Excerpt from IRS Publication 963, Federal – State Reference Guide (Rev. 10-2006), which provides additional information and examples of fact patterns illustrating worker status determinations.

 

Agency Actions

Use Attachments A, B and C to make worker status determinations.  If there are no material differences in the factual circumstances that apply to a group of similarly situated workers, then one worker status determination for the group of workers as a whole can be used, rather than make an individual determination for each worker.

Develop internal procedures for making worker status determinations that are consistent with the regulations of the IRS and OSC policy.
 
Communicate IRS policy, OSC’s guidelines and your agency’s internal procedures for compliance to all business and administrative control units in your agency.

Follow the established procedures to make appropriate determinations and take necessary actions to stay in compliance with existing laws.  A worker status determination must be undertaken in all cases where (i) your agency makes recurring payments to an individual for services rendered to the State, and (ii) the individual is not already being paid through the New York State Payroll System as an employee.

However, depending on the circumstances, it is possible that even a one-time payment may trigger the need for a worker status determination if your agency exercises the requisite degree of control over how the individual performs the services.

In addition, there may be infrequent occasions where a State employee performs services that are unrelated to the normal duties of his or her employment, and where a determination has been made under the guidelines contained in this Bulletin that the worker should be treated as an independent contractor with respect to those services.  In the absence of another mechanism for making payment, payment for such services would be made on a New York State Voucher rather than through the Payroll System.  Such cases would be exceptional, and would likely be subject to special scrutiny.

Document all worker status determinations. Your documentation must clearly support the determination you made to classify an individual as an employee or an independent contractor.

Maintain a completed copy of the documentation supporting your worker status determinations for a minimum of seven (7) years.  This documentation must be available in the event of an OSC review and/or IRS audit.

 

Questions

Questions concerning this bulletin may be directed to the Payroll mailbox.  Questions about Bulletin G-233 (Independent Contractor/Employee Determinations) should be directed to the Bureau of State Expenditures, Federal Reporting Unit, at (518) 486-4602 or email fedrep@osc.state.ny.us.