I've worked in the for-profit education space for fifteen years. The last five years have been devoted to helping small and mid-sized companies compete with the industry heavy-weights. One of the best ways to compete is through superior human resource strategy. Put simply, have better people on staff than your competitors. Generally, this is easier said than done; larger companies have deeper pockets, career-pathing protocols, and benefit packages to attract talent. These are some of the benefits of an employer-employee relationship.
When someone is an employee it tends to cost a company more at the front end of the relationship (about 20% more for each payroll dollar). However, in the long term, the relationship may hedge against a greater expense. Things like extended employee tenure, reduced churn (the rate at which folks turn-over), and non-competition relationships are positive benefits of an employer-employee relationships.
On the other hand, the idea of hiring a tutor-as-contractor has created a new segment in the gig-economy; we'll call this segment the tutor-broker segment. These brokers are pass-through entities which essentially match tutors with students but have less of an ability to control the quality of the process beyond the match. That is not to say that these companies disregard or somehow feel quality is unimportant. The lack of quality control in the tutor-broker space is essentially dictated by the nature of the employee relationship; the tutor-as-contractor (vs. tutor-as-employee) designation to be precise.
So why go this route? Well, there are also many benefits to having a tutor-as-contractor relationship. For example, there are no payroll taxes, FICA nor benefit % added to each payroll dollar. Tax filing & payroll are easier and less complex, and training may not be required. Taken together, one can see the appeal, The trade-off is control--or lack of control to be more accurate.
What I mean by "lack of control" is detailed in the following sections on IRS designations. In short, the way we read the below suggests that one cannot treat a tutor as a contractor and then hope to do things like: schedule tutors centrally, engage in training, or even expect the contracted tutor to attend meetings. To know for certain what can and cannot be done, one should check with the current IRS requirements as well as one's state labor board.
Ironically, many small tutoring companies are caught in the middle. They hire tutors as contractors yet they spend time and money training, developing, and reviewing their staff members. The argument 'for' this approach is laudable: to improve quality and consistency which helps maintain brand integrity. But such activities may create a bit of a catch-22 for smaller firms; how can one control quality yet contract with, rather than employ, a tutor? The answer may be at the state level where the company does business. At the federal level the requirements seem straight forward but there are exceptions.
Steps to determine if your tutors are employees or subcontractors
The IRS test often is termed the “right-to-control test” because each factor is designed to evaluate who controls how work is performed. Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.
There are 20 criteria the IRS uses to make a determination.
A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker's status. The individual circumstances of each case determine the weight IRS assigns different factors.
NOTE: Employers uncertain about how to classify a worker can request an IRS determination by filing Form SS-8, “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, some tax specialists caution that IRS usually classifies workers as employees whenever their status is not clear-cut. In addition, employers that request an IRS determination lose certain protections against liability for misclassification.
The common law test
The common law test: IRS examiners use the 20-factor common law test to measure how much control you have over the worker. These factors are reflected on IRS Form SS-8, (this form can be downloaded at www.irs.gov)“Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”
You can fill out the SS-8, including the facts of your relationship with the worker, and submit it to the IRS to get a determination of whether the worker is your employee or not. The rumor seems to be that if one fills out this form, the unintentionally seal their fate by inviting scrutiny.
The reasonable basis test
The reasonable basis test is considered a “safe harbor.” That is, if you can show you had a reasonable basis for treating a worker as an independent contractor, the IRS is prohibited from reclassifying the worker as your employee either prospectively or retroactively. You have a reasonable basis for treating a worker as an independent if one or more of the following conditions exist:
-A court ruling in favor of treating workers in similar circumstances as non-employees;
-A ruling by the IRS (usually a Revenue Ruling) stating that similar workers are not employees subject to employment taxes;
-An IRS Technical Advice Memorandum or Private Letter Ruling issued to your company, indicating that the particular worker isn't an employee;
-A past IRS payroll audit that didn't find workers in similar positions at your company to be employees; or
-A longstanding, widely recognized practice in your industry of treating similar workers as independent contractors.
NOTE: The Treasury Inspector General for Tax Administration has recommended that IRS pursue legislative proposals that would mandate withholding of income taxes on payments made to independent contractors and require monthly estimated tax payments. TIGTA made these recommendations in order to curtail estimated tax payment
Your State and the test
Although the IRS has specific rules about the treatment of workers, it seems that they generally defer to State Labor Rules when there is gray area. For that reason we recommend researching how "tutoring, teaching, and instruction" is designated within your respective state.
