OFFICE OF MANAGEMENT AND PAGE 1 OF 3
STATUS - EMPLOYEE VERSUS INDEPENDENT CONTRACTOR
AGENCY FISCAL OFFICERS, AGENCY PROCUREMENT OFFICERS,
PERSONNEL OFFICERS AND PAYROLL OFFICERS
CONTACT: KATHY A. STEEPY
The State of New
Jersey, along with all other employers in the
United States, is required to make determinations as to whether
certain payments, made to individuals qualify as "covered wages"
in accordance with the Federal Social Security Act. In all
instances where payments are identified as covered wages, State
agencies are required to withhold FICA taxes from those payments.
The primary criteria
to be used in determining whether an
individual receiving payment for services rendered is to be
considered an employee (and, therefore subject to FICA
withholding) or an independent contractor is whether the party
for whom work is performed has the right to direct and control
the way in which that person works, both as to final results and
as to the detail of when, where, and how the work is to be done.
A person is considered
to be an independent contractor if the
individual is self-employed or is an employee of a firm,
corporation, business, etc., other than the State.
Individuals engaged in the pursuit of an independent trade,
business, or profession in which they offer their services to
the public are generally considered to be independent
contractors rather than employees. An independent contractor
usually agrees to perform or complete a specific job or
service and is responsible for its satisfactory completion.
In addition, it is the contractor who has the right to direct
and control the way in which the work is performed, both as to
final results and as to the details of when, where, and how
the work is to be done.
AS INDEPENDENT CONTRACTOR
There can be situations
in which an employee receives payments
as an independent contractor, in addition to the employee's
normal salary, when the services rendered are not a part of
the employee's daily routine of work. Compensation for such
services is paid on a flat fee or per diem basis and the
services performed are rendered during a period other than the
employee's regularly scheduled work hours. The final
determination as to whether the person providing such services
is an independent contractor shall be made in accordance with
the criteria set forth in this Circular Letter.
EMPLOYEE RETURNING TO SERVICE
Many of the issues
concerning the definition of employment
versus self-employment concern employees who return to work
after retirement from State service. It is often assumed by
both the employee and former employer that, if the employee
returns to service following retirement, the employee
qualifies to be treated, for compensation purposes, as a
consultant or self-employed contractor. Very often the
retired employee performs in essentially the same or
comparable manner as before retirement; in these instances,
the position that the retired employee is a consultant or
self-employed rarely can be sustained and may result in
forfeiture of pension benefits. All such cases should be
referred, without exception, to the Division of Pensions and
Benefits to avoid any unintended forfeiture of a pension by a
former employee who does not meet the criteria for status as a
consultant or self-employed individual when returning to work
for the State.
It shall be the
responsibility of the appointing authority to
inform the person engaged, prior to the performance of
services, as to whether that individual will be compensated as
an employee or as an independent contractor. The State may be
liable for penalties and interest if an individual is
misclassified as a contractor; any penalty or interest will be
charged to the offending agency's appropriation.
Under the provisions
of the Social Security Act, certain payments
may be considered "covered wages" subject to FICA tax. To comply
with federal tax regulations, State agencies must determine which
payments are properly considered covered wages for the purpose of
withholding FICA taxes where applicable. These guidelines and
the examples provided are not intended to be an exhaustive list.
Agency fiscal officers are responsible for making final
determination as to taxability based on these guidelines and an
evaluation of the attendant circumstances of each case.
A.PAYMENTS TO OTHER
Payments to companies,
corporations and other governmental
units are exempt from FICA withholding tax.
B.PAYMENTS TO INDIVIDUALS
Prior to the engagement
of an individual for performance of
service, a determination must be made as to employee versus
independent contractor status. Those services deemed to be that of
an employee must be paid through the centralized payroll system.
Those services deemed to be an independent contractor must be paid
through the New Jersey Comprehensive Financial System (NJCFS).
C.PAYMENTS NOT FOR
to employees for reimbursement of job related
expenses, such as travel and various petty cash expenditures, are
exempt from tax. However, some payments, not for services, are
considered wages subject to tax. For example, suggestion awards
and lump sum payments of unused sick leave upon retirement.
D.PAYMENTS TO EMPLOYEES
FOR WORK PERFORMED SOLELY ON A FEE BASIS
solely on a fee basis performed as an
employee of a state, or political subdivision thereof, are
subject to self-employment coverage. However, if the services
are covered under an agreement between the U.S. Secretary of
Health and Human Services and the state for which the services
are rendered, the services would be covered as employment.
When a fee is
paid by the same organization or agency that
pays the employee his regular salary, it is difficult to meet
the definition of an independent contractor. As a result,
this payment should generally be considered subject to tax.
E.IRS - THE COMMON
LAW STANDARD (Appendix - to obtain a copy,
call Cynthia Quig @ 609-292-5358)
REQUEST FOR RULING
OF QUESTIONABLE ITEMS
Requests for rulings
and determination of questionable items
should be directed to the Office of Management and Budget,
Assistant Director, Financial Management.
Payments to independent
contractors must be processed through the
NJCFS. Agencies should use standard forms and follow procedures
specified in the Procedures Manual for the NJCFS issued by the
Department of the Treasury.
to be covered wages subject to tax must be
processed for payment through the State's centralized payroll
system by agency fiscal officers.
Elizabeth L. Pugh