Employee or Contractor? A Guide for Microschool Leaders

Especially this time of year, as microschool leaders are making their staffing decisions for the coming school year, the National Microschooling Center team is often asked for guidance about whether these should be employee or contractor relationships.

While working with consultants can often seem attractive to microschools because of the perceptions of flexibility, it is important to recognize that the Internal Revenue Service, as well as other federal and state government authorities, have rules they rely on to determine whether a contracting or consulting relationship is appropriate.

“If a business misclassified an employee,” the IRS website warns, “the business can be held liable for employment taxes for that worker.” These government entities take adherence to their classification rules for workers seriously, and employers can be subject to significant penalties, audits and other sanctions if they are deemed out of compliance.

In addition, many state employment commissions have begun conducting their own audits. While their guidelines are generally similar, they are not always the same and it is strongly advisable that businesses learn the specific requirements for employee versus contract status in their state.

The IRS publishes general guidelines for employers to use determine employee versus contractor status.

“An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done,” advises the IRS. “What matters is that the business has the right to control the details of how the worker's services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.”

The agency references the following factors on its website for employers to consider in deciding whether a worker should be treated as an employee or a contractor.

• Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
• Financial control − Does the business direct or control the financial and business aspects of the worker's job. Are the business aspects of the worker's job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
• Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

The U.S. Department of Labor provides this 7-step guide to understanding the required distinctions. While the document references the Fair Labor Standards Act, which most microschools are considered too small to be required to adhere too (unless they operate in multiple states or have annual revenues above $500,000, in which case they should review requirements carefully), the IRS still utilizes the Department of Labor guide in its own publications and resources.

For more detailed guidance, many government-affiliated organizations share this 20-point checklist as a tool to help understand how the federal guidelines should apply to individual businesses and circumstances.