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Identify Employee vs Independent Contractor

Why is Worker Classification Important?

The University often contracts with independent contractors (workers) who are self-employed, i.e. have their own business. Examples include individuals with expertise in marketing, design, athletic training, etc. Sometimes these workers have no affiliation with the University. On rare occasions, they are already employees of the University. Importantly, depending on the unique circumstances for each worker and the work to be performed, the federal government may classify that worker as a new employee, or if currently employed by the University, that the new work will be considered another employee assignment. If the Federal government considers the worker an employee, the University is required to comply with federal and state wage and hour laws, and to withhold employment taxes. Failure to comply with federal and state labor and tax laws may result in significant penalties to the University.  

Therefore, prior to making an employment or contracting commitment, the department must determine whether a service provider is an employee of the University or an independent contractor, also known as Worker Classification. The department must avoid any arrangement (such as designating a true employee as an independent contractor) which has the effect of circumventing or violating University policy, or State or Federal laws.

The following information will help you to correctly determine whether the service provider is an employee or independent contractor. Whenever in doubt, contact Purchasing Services prior to discussing and/or negotiating payment terms with the service provider.

Who is Responsible for Determining Worker Classification

  • The University has made pre-determinations for certain categories of workers (see step 2, below).
  • If the University has not made a pre-determination classification that covers your worker's situation:
    • For sponsored accounts, documentation of the process of selection of an individual is the responsibility of the principal investigator.
    • For all other budgets, documentation of the process of selection of an individual is the responsibility of the department head.
    • The principal investigator or the department head must retain documentation of the classification decisions (20-Factor Test, see below for more information) with the transaction record, as support in the event of an audit.

Process for Determining Worker Classification

Follow these steps whenever the department or principal investigator requires services to be performed by an individual:

Step 1

Justify the service as essential and that the selection of a worker is in conformance with University policies and procedures, such as the University’s purchasing conflict-of-interest and competitive bidding policies, which are designed to secure the most qualified worker(s) available at compensation that is appropriate both for the advice provided and for the qualification of the worker(s).

Step 2

Review the following information for categories of workers that have already been classified in order to expedite your contracting process.

Always Treated as an Independent Contractor

The following services will not need to have a 20-Factor Test determination completed before contracting with the service provider since the University has evaluated and classified the following general classes of service providers as independent contractors: 

  • Sporting officials for intercollegiate athletic events; 
  • Announcers and commentators for athletic events; 
  • Academic program review consultants (including accreditation team members); 
  • Performers, entertainers, professional athletes, i.e., non-employees who provide entertainment services to the University, for a fee. Examples: DJs, singers, bands, comedians, magicians, motivational speakers, etc.; 
  • Guest Speakers, i.e., non-employees who provide services to the University for a fee (or honorarium) in which one-time lectures, discourses or presentations are given before classes or audiences; 
  • Series editor, copy editor, manuscript reader, or book designer; and 
  • Trainers and consultants under contract to present seminars for the Pennsylvania Child Welfare Resource Center. 

Always Treated as an Employee

The following workers will always be classified and paid as either regular or temporary employees through the Office of Human Resources in one of two ways:

  • If the worker is not already an employee, they should be paid by All-Temps.
  • If the worker is already an employee, it should be processed under an Individual Compensation Plan, or ICP, formerly known as a supplemental payment request, for a second assignment – an additional duty not related to their primary role. These are processed through the Compensation department.

There is no need to complete the 20-Factor test for the following workers:

  • Individuals providing instruction or teaching services. Since education is one of the University's primary missions, the IRS will always view these types of payments as employment. 
  • Individuals providing administrative, secretarial, clerical, housekeeping, maintenance, temporary or seasonal laborers, and event workers (cashiers, ticket takers, wait staff, parking attendants, ushers, etc.), or routinely providing any other services normally provided by an employee.

Other Red Flag Situations Leaning Toward Employee Classification and Requiring Assessment

Unless your situation is listed above, you will need to complete the IRS 20-Factor Test below, and attach the determination page to the Services Agreement Specialty Form in the PantherExpress System.   

Before you begin, here are a few red flags that will make it highly unlikely that the worker will be classified as an independent contractor, and must be paid as either a regular or temporary employee through Human ResourcesYou must still review the common law guidelines and complete the IRS 20 Factor test below, but these red flags will alert you to a potential issue. 

  • The University of Pittsburgh is the worker’s only customer. 
  • The worker is already a faculty staff or student employee of the University or has been employed by the University within the last 12 months, regardless of the department or source of funds.  Even if employed in another unrelated area of the University, the additional duties will most likely be considered a second employment assignment, or a continuation of employment if recently terminated. 
  • Note: There is a rarely used special interest "Hobby Payments" exception for a service performed by an employee, that could be considered a recreational hobby. The IRS states that a key feature of a hobby is that it is not done to make a profit. The service cannot be related to the regular duties performed by the employee at the University. For example: an individual who is employed by the University to teach Chemistry but is a photographer, baseball umpire, artist, etc. on the side. 

Step 3

Review the Common Law Guidelines and Complete the 20-Factor Test.

The IRS has developed a very general “common law” guideline resulting from court cases. This guideline states that an individual worker is an independent contractor if the University has the right to control or direct only the result of the work, NOT what will be done and how it will be done. The IRS provides further details on the patterns of behavior and financial control that are typical when a service provider is considered an employee. 

  • Behavioral Control: Facts which illustrate whether there is a right to direct or control how the worker performs the specific task for which he/she is hired (i.e., providing instructions or training);
  • Financial Control: Facts which illustrate whether there is a right to direct or control how the business aspects of the worker's activities are conducted (i.e., significant investment, unreimbursed expenses such as rent and utilities, advertising, wages of assistants, licensing, insurance, supplies, etc.);
  • Relationship of Parties: Facts which illustrate how the parties perceive their relationship (i.e., employee benefits, intent of the parties, written contracts, permanency, discharge/termination, integration into regular business activities).

The 20-Factor Test

The 20-Factor Test is a tool that is designed to help determine whether a worker or class of workers hired by the University to perform services should be classified as an employee or as an independent contractor. Note, using the Firefox browser and clearing your cache yield the best results when utilizing the 20-Factor Test.

Before you complete the 20-Factor test, the service provider must be: 

  • at least 18 years of age 
  • eligible to work in the U.S. 

Step 4

If results of the 20-Factor Test determine that the individual should be classified as an:

Employee

  • If the worker is not already an employee, they should be paid by All-Temps.
  • If the worker is already an employee, it should be processed under an Individual Compensation Plan, or ICP, formerly known as a supplemental payment request, for a second assignment – an additional duty not related to their primary role. These are processed through the Compensation department.

Independent Contractor

  1. Establish the independent contractor in the PantherExpress System with a Supplier Verification Form and a W-9
    • For services ​valued at $10K or less - submit a fully executed Services Agreement (Short-Form Domestic) and the results of the 20-Factor Test as internal attachments through the PantherExpress System using the Services Agreement Specialty Form.  
    • For services valued greater than $10,000 - submit a Contract Entry Form, Schedule - A Scope of Services, and the results of the 20-Factor Test as an internal attachment through the PantherExpress System using the Services Agreement Specialty Form.
Payment to an Independent Contractor

To make a payment to an independent contractor, follow this procedure. The required information ensures compliance with IRS and other regulations:​

After a purchase order number has been generated as a result of the Services Agreement Specialty Form in the PantherExpress System, process the service provider's invoice through the "create invoice" process in the PantherExpress System.

Additional forms that are required for Permanent Residents and TN VISA holders are as follows:

Permanent Residents

  • Form UPP 192, Alien Determination of Residency Form
  • Copy of Permanent Resident or Resident Alien card (green card) or copy of the I-551 Stamp that is printed on the applicant's passport

TN VISA holders

  • Form UPP 192, Alien Determination of Residency Form;
  • IRS Form W-8BEN-I, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding; and
  • IRS Form 8233, Exemption from Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual (TN VISA holders claiming tax treaty).

Travel expenses guidelines are as follows:

  • All travel expenses for independent contractors must be included as a "not-to-exceed" amount in the Services Agreement.
  • University departments shall not submit an independent contractor's travel expenses through Concur as the Payment Processing department will reject the request and return it to the department.
Documentation & Tax Reporting Requirements for Independent Contractors

Independent contractors who are United States citizens or resident aliens for tax purposes

For an independent contractor who is a United States citizen or resident alien for tax purposes, a Taxpayer Identification Number (TIN), or social security number, and a permanent mailing address are required prior to making payments to an independent contractor, since the University must accumulate payments for possible information return reporting on a Miscellaneous Income, IRS form 1099. Note: The preferred method of obtaining the TIN and address is by having the independent contractor complete a Request for Taxpayer Identification Number and Certification, IRS form W-9. The Request for Taxpayer Identification Number and Certification, IRS form W-9, may be obtained from Payment Processing, or from the IRS directly.

Independent contractors who are nonresident aliens for tax purposes

Payments made to nonresident aliens are subject to a different set of federal tax laws than are payments made to U.S. citizens or resident aliens. View the Foreign Nationals page for more information.

Other Types of Service Providers

Foreign Individuals to Perform Services Outside of the United States

University departments are not permitted to contract with non-United States persons for services to be performed outside the United States. Visit this page to learn more about international service agreements.

Additional Resources