This document discusses the differences between independent contractors and employees, as well as an IRS audit that a school district underwent to determine the proper classification of various workers. The audit found several misclassifications and resulted in penalties and back taxes owed. As a result, the school district implemented new processes and tools to properly classify workers going forward, including a vendor questionnaire, contracts with clear scopes of work, and a centralized contracting system. The proper classification of workers is important for tax and liability reasons.

1. Independent Contractors vs. Employees
Rennette Apodoca, MPA, CPPO, Albuquerque Public Schools
Doug Vandenboom, University of Idaho

2. What is a Service?
NIGP:
Intangible commodity
IRS:
Furnishing of labor, time, or
effort does not involve any
specific end product (good)

3. Our Story
• Contracting Process
• Decentralization
• Origination
• Management
• Purchasing’s Role
• Resources
• Volume and Value
• Variety of Agreements
• Chaos!

4. IRS AUDIT
• Timing
• Audit began in Fall 0f 2013
• Settlement in Spring of 2015
• Scope
• Initial scope
• 941 Audit
• 1098-T
• 1099 / W2
• Comp Time

5. A Call For Help
• Primary Departments:
• Contracts & Purchasing
• Student Accounts
• Accounts Payable
• Human Resources
• Payroll
• Career Center
• Legal Counsel

6. Determinations – IRS places
determination on the owner
• Can you tell by looking at
them?
• Where they reside?
• How about their title?
• How about the amount of the
contract?
• What if we ask the requesting
department?

7. Ask Questions!

8. Why Does it Matter?
• Taxes
• Benefits
• Penalties
• Interests
• Could be sued

9. IRS Classifications
• Employee
• Statutory employee
• Non-statutory employee
• Independent Contractor

10. IRS
• Department of Labor Standards
differ and sometimes conflict
with IRS
• Updated July 2015
• Increased focus on use of
economic factors to determine
nature of the relationship
• What is the core business of a
university?
Department of
Labor (FLSA)
• Behavioral Control
• Financial Control
• Type of Relationship

11.
Common IRS Employee
Attributes
• Comply with instructions about
when, where, and how work is
to be performed
• Trained to perform services in a
particular way
• Services rendered personally
• Continuing Relationship
• Employer sets employers hours
and days
• Is furnished tools, materials,
supplies

12. Common IRS
Contractor Attributes
• Set their own hours and do the
job their own way
• Perform work by their own
method
• Receive no training from the
purchaser of their services
• Assign their own workers to do
the job
• Hired to do one job; no
continuous relationship
• Realize a profit or loss
Areas of Concern
• Individuals with a 1099 and W2
in the same tax year
• Grants:
• External Evaluators
• Pass-through grants
• Event Planners
• Students

13. How to make a
determination?
• Vendor questionnaire
• IRS SS – 8
• Contracts – Scope of Work

14. What happens if
you have an improper
determination ?
• Volunteer Classification
Settlement Program
• Relief under Section 530

15. Post-Audit Action
Plan
• Assembled a standing group
with representation from all
primary departments
• Process mapping
• Workflow
• Decision Trees
• Clear separation on areas of
responsibility
• Communication Strategy

16. Purchasing’s Role
• Improve the Contracting
Process
• Increase efficiencies
• Transparency
• Internal Controls
• Challenges
• Change Management
• Resources
• Time

17. Process Improvement
• Goals
• Accessibility
• Efficiency
• Analytics / Visibility
• Central Repository
• Timing
• Expandability

18. Our Progress
• A new way of contracting
• Demo of new system
Moving Forward
• System Expansion
• Training and development for
campus users

19. Questions?