This is the seventh year we’re writing this piece and our philosophy hasn’t changed: the actual product of an educational service provider is the tutor or college planner–not the company’s methods, materials, nor brand name.
Because the tutor ostensibly is the product, the human resource function is critical. Better tutors generate referrals and our business is based on word of mouth reputation. Therefore, the most important aspect of running an educational services business is to have the best talent on staff. The problem, lately, seems to be in finding those folks.
Finding good tutors can be a challenge especially since there are myriad ways for aspiring tutors to start tutoring outside of an established company. We’ll posit that this is due in large part to the advent of the tutor matching sites and shifting client purchase habits. With regard to the first: matching sites contract tutors and IECs and then match them with students through an online marketplace. In this way, the matching site does not “hire” anyone–it simply treats everyone as a sub-contractor. The staffing business model is essentially: tutor-as-contractor (IRS Form W9/1099) vs. tutor-as-employee (IRS Form W4/W2).
Two important points about this:
- Independent contractors cost 15-20% less than part-time employees.
- The supply of independent tutors in the market place has greatly increased due to the number of channels through which they can tutor.
The good news is that this disruption has a limitation: quality control. When one contracts a tutor one cannot:
- schedule the tutor directly
- tell the tutor how to instruct
- tell the tutor what materials to use
That lack of control is detailed at the end of the article in “Sections on IRS designations.”
So why go the tutor-as-contractor route?
- There are no payroll taxes nor are FICA nor benefit % added into payroll
- Tax filing is easier and less complex and no paid company training is required
- Exposure to liability is reduced since the tutor is not an employee
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.
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;
- A longstanding, widely recognized practice in your industry of treating similar workers as independent contractors.
As daunting as these guidelines are, they can be navigated. Beyond which, there may be help at the state level:
- 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.
Okay, we now know about the limitations/benefits of contracting a tutor but what about employing them?
Officially “hiring” a tutor allows one to set specific expectations related to punctuality, comportment, and customer service. Further, it gives the hiring company the ability to offer a robust on-boarding system which, if done well, contributes to tutor satisfaction and employee retention. Lastly, it gives the company–not the tutor–complete ownership of the client.
The downside to hiring vs. contracting, as you might have guessed, is that it is more costly; on-boarding and training cost money and processing payroll requires time as well as an additional 15%-20% expense for payroll tax & FICA.
In most cases, the element of how much or how little control one wants, needs, or is allowed to have over the workforce should inform the decision on whether to employ vs. contract a tutor.
