The purpose of this document is to provide IRS guidance that clarifies the questions contained in the University of Minnesota Financial Forms Nirvana Consulting and Professional Services contract and payment processing method. Your response to these questions enable the University of Minnesota to properly classify a service provider as an employee or independent contractor and to better comply with certain other federal and state legal requirements.

1. Has the contractor ever been employed at the University?

The IRS generally takes a position that all payments to an individual currently on the University of Minnesota payroll should be treated as employee compensation to that individual. The IRS position is strengthened when the nature of the services provided to one department is similar to the nature of services provided to another department or program. Some former employees can legitimately become contractors in certain instances. However, we need to be certain that they are not hired to perform the same, or similar job or services they performed as employees.

2. Does the University have the right to control how the work results are achieved?

An employee is generally subject to the University’s instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the University of University department has the right to control how the work results are achieved. IRS notes that even if the business lacks the knowledge to instruct some highly specialized professionals or the task may require little or no instruction, the key consideration is whether the business has retained the right to control the details of the worker's performance or has given up that right. The absence of need to control should not be confused with the absence of right to control.

3. Does the University provide the contractor with any training?

An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods. Some voluntary training, however, could be provided to either contractors or employees such as orientation or information sessions about the department's or University's policies or programs.

4. Does the University reimburse expenses incurred by the contractor in connection with the worker’s performance of services?

Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important in establishing an independent contractor status. To the extent a service provider builds estimated costs into a fixed fee arrangement with the University where no out of pocket expenses are reimbursed, the University can establish the service provider’s risk of profit or loss.

5. Will the University pay the contractor hourly, weekly, or monthly?

An employee is generally paid by the hour, week, or month. With a guaranteed return for labor, there is no opportunity for profit or loss and further evidence of an employer/employee relationship. An independent contractor is usually paid by the job. However, there are some lines of business that typically pay contractors on an hourly basis.

6. Will the University provide the contractor with insurance, pension benefits, vacation or sick pay?

An employee is provided with such benefits from the University; an independent contractor is not.

7. Does the University expect its relationship with the contractor to continue indefinitely?

If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship. Contractors will typically have a temporary relationship with a business, but so too will some employees be hired on a temporary or seasonal basis. Note: long-term should not be confused with an indefinite relationship. Both employees and contractors could have a long-term - but not indefinite - relationship.

8. Will the services provided by the contractor represent a key aspect of the University department’s regular business activity?

If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

9. Does the contractor have a personal investment in the facilities he or she uses in performing services at the University?

An independent contractor often has a significant investment in the facilities or equipment he or she uses in performing services for someone else. Keep in mind, however, that some types of work simply do not require large expenditures, and contractors may rent (instead of purchase) the equipment needed at fair rental value.

10. Is this person teaching a class for credit or providing class instruction for credit?

Teaching a class for credit is a "key aspect" of the University's regular business and is rendered by employees.

11. Can the contractor realize a profit or loss in connection with this engagement?

An independent contractor can make a profit or loss. Independent contractors are free to make business decisions that affect the worker's "bottom line". Employees can make decisions that affect the University's "bottom line", but does not affect their own income. Note: Profit and Loss can also be equated with the person's ability to quit, or the University's ability to terminate the relationship. If the worker has the ability to quit it tends to indicate an employer/employee relationship. Independent contracts normally stipulate the relationship of the parties and the contract termination criteria.

12. Does the contractor make his or her services available to the relevant market in the general public?

An independent contractor generally publicizes the availability of his or her services to the general public. Business cards, resumes, telephone directory listings and other forms of solicitation demonstrate that a contractor makes his or her services available to the relevant market in the general public.