Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: April 13, 2007             No. 8

Ask SSC . . .  

Is There a Conflict Between STRS and IRS Regulations? 

Q.                We recently received a directive from the State Teachers’ Retirement System (STRS) that refers to the requirement of a district to report earnings by a STRS retiree, even if he/she is not paid as an employee of the district but as an independent contractor. I thought the Internal Revenue Service (IRS) did not allow that. Is that true? 

A.                 From the IRS perspective, there are restrictions on payments to individuals being treated as independent contractors rather than employees. This is because employers have been found to be hiring individuals who function like employees, but who are paid through vendor warrants, so, therefore, no taxes are withheld and no statutory contributions are made. The IRS has been performing audits of school agencies for this very purpose, and the agencies are being assessed back taxes and penalties when found to be paying independent contractors who should have been classified as employees. Visit the IRS website at http://www.irs.gov/charities/article/0,,id=128602,00.html for more information on how to determine whether an individual can appropriately be classified as an independent contractor.   

            In answer to your question, it could appear that there is a conflict between STRS and the IRS code from the perspective that STRS appears to “allow” independent contractors to function in “activities considered to be creditable service and, therefore subject to the earnings limitation” (STRS Employer Directive 2006-02), which would be positions that require certification—typically employee jobs. However, we believe that the intent here is to require reporting to STRS in order to be comprehensive about capturing any amounts that STRS retirees may be earning—whether they are being paid as an employee by the district, as an employee of a third party that is paid by the district, or as an independent contractor. We don’t believe that the STRS code “allows” school agencies to choose to pay someone as an independent contractor rather than an employee—that should be determined by the IRS regulations.

--Sheila G. Vickers