Handbook of Business Procedures

12.3. CLASSIFICATION OF SERVICE PROVIDER - INDEPENDENT CONTRACTOR VERSUS EMPLOYEE

A. Introduction

Individuals providing services to the University of Texas at Austin (“University”) must be classified as independent contractors or employees. The University is concerned with this worker classification because it is liable for the taxes, penalties, and interest that result from a misclassification. An “individual” means a natural person, a sole proprietor business, or a single-member LLC disregarded for federal tax purposes.

Whether an individual is classified as an employee or independent contractor is not determined by the name ascribed by a college, school, or unit, but instead by the Internal Revenue Service (IRS). Generally, an individual that works for the University has an appointed position and is classified as an employee. However, an individual without an appointment may still be classified as an “employee” by the IRS. The University identifies these individuals as an employee based on the result of the Employee/Independent Contractor Classification Checklist (EICCC).

An individual who was previously an appointed employee providing services similar to their previous job duties is classified as an employee, not an independent contractor.

B. Employee/Independent Contractor Classification Checklist

The University created the Employee/Independent Contractor Classification Checklist (EICCC)  to classify workers, minimize risk, and alleviate IRS complexities. Occasionally, an individual’s classification must be changed notwithstanding the results on an EICCC.

Each worker classification is based on the totality of the facts and circumstances. Generally, when the University has the right to control and direct an individual, or trains that individual, the individual is classified as an employee. An independent contractor generally has a high level of expertise, requires no training, and operates a business that provides similar services to the general public.

Departments are responsible for completing the EICCC after obtaining the data necessary to complete it from an individual that will provide services to the University. The EICCC cannot be completed by the individual providing the services.

Further guidance for completing the checklist is on the Tax Services EICCC webpage. If a department has a question or concern about the EICCC or its result, please contact Tax Services.

C. IRS Rules for Worker Classification

The IRS examines the relationship between an individual and the University focusing on the individual’s degree of control and independence. The facts on control and independence fall into three categories – Behavioral Control, Financial Control, and Relationship of the Parties.

1. Behavioral Control

Covers facts that show the University has a right to direct and control what work is accomplished and how the work is done through: instructions, training, or other means

2. Financial Control

Covers facts that show the University has a right to direct or control the financial and business aspects of the individual’s job and may include:

• extent to which the individual has unreimbursed business expenses
• extent of the individual's investment in tools and facilities
• extent to which the individual’s services are available to the market
• how the University pays the individual
• extent to which the individual can realize a profit or incur a loss beyond that of an employee

3. Relationship of the Parties

Covers facts showing the relationship between the University and the individual and may include: 

• Written contracts, purchase orders, and the like describing the intended relationship
• permanency of the relationship
• extent to which services provided by the individual are a key aspect of the University’s mission or business

Recent IRS guidance has focused on these three categories, but the 20 factors previously used are still relevant when classifying an individual. 

D. Resources

• Employee/Independent Contractor Classification Checklist
• Tax Services EICCC website
• Payroll Services website
• IRS website: Independent Contractor (Self-Employed) or Employee?
• IRS Publication 1779: Independent Contractor or Employee
• IRS Tax Topic 762: Independent Contractor vs. Employee
• 20 factors identified by the IRS on page 3 of the Present Law and Background Relating to Worker Classification for Federal Tax Purposes document
• IRS website: Single Member Limited Liability Companies

Part 12. Independent Contractors - Table of Contents