Are the speech, occupational, and physical therapists who provide preschool special-education and early-intervention services independent contractors or employees for New York withholding tax purposes?

Plain-English summary

Cam-Held Enterprises Inc., doing business as Just Kids Early Learning Center (Early Learning), and its affiliate Just Kids Diagnostic and Treatment Center, Inc. (Diagnostic), asked the Department whether the speech, occupational, and physical therapists who treat children in Early Learning's programs are independent contractors or employees for New York withholding tax purposes under Tax Law § 671.

Early Learning runs two state-authorized programs: a preschool special education program under Education Law § 4410 (federally authorized by IDEA Part B) for children ages 3 to 5, and early intervention services under Article 63 of the Public Health Law (IDEA Part C) for children under 3. Each child's services are set out in an order - an Individualized Education Plan (IEP) or Individualized Family Services Plan (IFSP) - whose form and content are dictated by federal standards. Early Learning contracts with Diagnostic, a licensed Article 28 clinic, to supply the therapists who carry out these plans.

The Department applied the federal common-law control test that New York's withholding regulations borrow from federal employment tax law (20 NYCRR 171.1(b), incorporating Treasury Regulations § 31.3401(c)-1 and the 20-factor guidance in IRS Revenue Ruling 87-41). Under that test, workers are employees when the party for whom they work controls not just the result of the work but the means and methods of accomplishing it.

Weighing the facts - Early Learning's supervision of progress notes, its setting of the Therapists' hours and child assignments, its monitoring of compliance with each child's IEP or IFSP, the at-will nature of the relationships, and mandatory in-service training - the Department concluded the Therapists are employees rather than independent contractors, even though many Therapists also work elsewhere and offer their services to the general public.

What this means for you

Businesses that contract for licensed professionals' services

Having workers hold independent professional licenses, work part-time, serve other clients, or make themselves available to the general public does not by itself make them independent contractors. If your organization directs the hours worked, assigns specific tasks, supervises compliance with a required plan (like an IEP or IFSP), and can terminate the relationship at will, the common-law control test likely makes those workers employees for New York withholding purposes.

Identifying which entity is the "employer" for withholding

Where two related entities split responsibilities - one entity (here, Early Learning) supervising the day-to-day work and another (Diagnostic) actually paying the workers - the entity that controls payment of wages is the employer required to withhold under Tax Law § 671 and 20 NYCRR 171.2, following 26 U.S.C. § 3401(d)(1). Supervision and payment can be split between affiliated companies, but the withholding duty follows whichever one controls the paycheck.

Common questions

Q: Does having an independent professional license (like a speech or physical therapy license) make someone an independent contractor?
A: No. The Department looked past the Therapists' professional licenses and focused on who controlled the means and methods of their work - not their job title or credentials.

Q: The Therapists worked for other organizations and served the general public - doesn't that make them independent contractors?
A: Not on its own. Those are only two of the 20 common-law factors from IRS Revenue Ruling 87-41. Here, the degree of control Early Learning exercised over hours, assignments, and progress reporting outweighed those factors.

Q: Which company had to withhold tax from the Therapists' pay - Early Learning or Diagnostic?
A: Diagnostic, because it controlled payment of the Therapists' wages. Under 26 U.S.C. § 3401(d)(1) and 20 NYCRR 171.2, the entity that controls wage payment is the "employer" responsible for withholding, even though Early Learning directed the day-to-day work.

Q: What test does New York use to decide employee-versus-independent-contractor status for withholding purposes?
A: New York's regulations (20 NYCRR 171.1(b)) apply the same common-law control test used for federal employment tax purposes, under Treasury Regulations § 31.3401(c)-1: whether the payer has the right to control not just the result of the work but the means and details of accomplishing it.

Citations and references

• Tax Law § 607(a) - terms in Article 22 are given the same meaning as under comparable federal income tax law
• Tax Law § 671(a)(1) - employer withholding obligation for New York personal income tax
• 20 NYCRR 171.1 - employer withholding requirement; incorporates federal rules for determining employer/employee status
• 20 NYCRR 171.2 - definition of "employer" for New York withholding purposes
• 26 U.S.C. § 3401(d) - federal definition of "employer," including the person who controls payment of wages
• 26 U.S.C. § 3402(a)(1) - federal wage withholding requirement
• 26 CFR 31.3401(c)-1 - common-law right-to-control test for determining employee status
• IRS Revenue Ruling 87-41, 1987-1 C.B. 296 - the 20-factor guide used to apply the common-law control test

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a05_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

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June 30, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I040211C

On February 11, 2004, a Petition for Advisory Opinion was received from Cam-Held
Enterprises Inc. d/b/a Just Kids Early Learning Center and Just Kids Diagnostic and Treatment
Center, Inc., c/o Pamela A. Madeiros, 54 State Street, 6th Floor, Albany, New York 12207.
The issue raised by Petitioners, Cam-Held Enterprises Inc., d/b/a Just Kids Early
Learning Center, and Just Kids Diagnostic and Treatment Center, Inc., is whether the therapists
described below are independent contractors or employees for purposes of withholding
New York State personal income tax pursuant to section 671 of the Tax Law.
Petitioners submit the following facts as the basis for this Advisory Opinion.
Cam-Held Enterprises Inc., d/b/a Just Kids Early Learning Center (Early Learning), owns
and operates Just Kids Diagnostic and Treatment Center, Inc. (Diagnostic).
Early Learning operates both: (1) a preschool special education program approved by the
New York State Department of Education pursuant to section 4410 of the Education Law (in
turn, authorized by the federal Individuals with Disabilities Education Act (IDEA), Part B, and
34 CFR parts 300 and 303) for children ages 3 to 5 years; and (2) early intervention services
approved by the New York State Department of Health pursuant to Article 63 of the Public
Health Law for children up to 3 years in age (authorized by IDEA, Part C).
Authorization for specific services to be provided by the Early Learning preschool special
education program (including type, frequency and duration) is provided by the local school
district Committee on PreSchool Special Education (CPSE) as directed by IDEA. Suffolk
County is the payor in the first instance, subsequently reimbursed, in part, by the State. The
authorization is in the form of an order referred to as an Individualized Education Plan (IEP), the
form and content of which are dictated by federal standards.
Similarly, the authorization for the provision of early intervention services is provided in
the form of an order referred to as an Individualized Family Services Plan (IFSP) through a
process which parallels the CPSE process under the preschool special education program. The
form and content of this order are also dictated by federal law.
Early Learning then contracts with Diagnostic, which has separate facilities in the same
building, for the services of a therapist to implement the IEP or IFSP.
Diagnostic contracts with speech therapists, occupational therapists, and physical
therapists (the Therapists). Each Therapist is required to have a professional license. Diagnostic

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is licensed by the New York State Department of Health as an Article 28 clinic pursuant to
Article 28 of the Public Health Law.
The IEP or IFSP usually provides for the Therapist to perform therapy on the premises of
Early Learning. However, the order often directs the Therapist to perform therapy at children’s
homes or other settings.
Early Learning is required to submit progress reports of the therapy to the County.
Accordingly, Early Learning requires the Therapists to submit progress reports to Early
Learning, which Early Learning then monitors. Early Learning provides supervision and
direction to the Therapists to ensure compliance with the IEP or IFSP. Each Therapist must
submit weekly progress notes measuring advancement against short-term and long-term
objectives set out in the IEP or IFSP. As the party under contract with the County, Early
Learning supervises the means and methods used by the Therapists to comply with the IEP or
IFSP.
The early intervention program requires that the responsible entity provide a three-month,
six-month and nine-month report, and an annual report, as well as a log of each treatment
session. The special education program also requires quarterly and annual progress reports, as
well as a log of each treatment session.
Early Learning specifies the hours that the Therapists work, specifically directing, for
example, a certain Therapist to provide services to a certain child from 10:00 a.m. to 10:30 a.m.
Most of the Therapists work full-time for Early Learning. However, the Therapists’ work for
Early Learning is not exclusive, as many Therapists perform work for other organizations, as
well. Many or most Therapists make their services available to the general public.
Early Learning periodically submits requests to the County for reimbursement. The
County conditions reimbursement on compliance with exacting billing protocols which include
the provision of the Therapists’ weekly progress notes, signed by an Early Learning supervisor.
All employment relationships with the Therapists are “at will” and can be terminated by
either party at any time. There is no specific arrangement as to termination of the relationship by
the Therapists, Early Learning and Diagnostic. All Therapists are paid bi-monthly by Diagnostic,
and all full-time Therapists are expected to perform 50 half-hour therapy sessions per week for
Early Learning. Early Learning and Diagnostic do not pay the Therapists’ business or traveling
expenses. The Therapists furnish their own tools and materials. All Therapists must attend “in­
service” training sessions sponsored by Early Learning, the County or the State Departments of
Health and Education, respectively. No economic loss is borne by either Early Learning or
Diagnostic, or the Therapists in connection with the special education and early intervention
programs, as Early Learning is reimbursed by the County, in the first instance.

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Applicable law and regulations
Section 607(a) of the Tax Law provides, in part:
General. Any term used in this article shall have the same meaning as when used
in a comparable context in the laws of the United States relating to federal income taxes,
unless a different meaning is clearly required. . . .
Section 671(a)(1) of the Tax Law provides:
Every employer maintaining an office or transacting business within this state and
making payment of any wages taxable under this article shall deduct and withhold from
such wages for each payroll period a tax computed in such manner as to result, so far as
practicable, in withholding from the employee's wages during each calendar year an
amount substantially equivalent to the tax reasonably estimated to be due under this
article resulting from the inclusion in the employee’s New York adjusted gross income or
New York source income of his wages received during such calendar year. The method
of determining the amount to be withheld shall be prescribed by regulations of the
commissioner, with due regard to the New York withholding exemptions of the employee
and the sum of any credits allowable against his tax.
Section 171.1 of the New York State Personal Income Tax Regulations (Regulations)
provides:
(a) Every employer maintaining an office or transacting business within
New York State, and making payment of any wages taxable under article 22 of the Tax
Law to a resident or nonresident individual, must deduct and withhold from such wages
for each payroll period such amount of New York State personal income tax as will result
in withholding from the employee's wages during each calendar year an amount
substantially equivalent to the New York State personal income tax reasonably estimated
to be due as the result of the inclusion of the employee's wages received during such
calendar year in the employee's New York adjusted gross income.
(b) For purposes of this Article, the provisions of the Federal Internal Revenue
Code and its applicable regulations, with respect to the deducting and withholding of
Federal income tax by employers from wages, including the meaning of the various
Federal terms (such as employer, employee, wages, payroll period, withholding
exemptions), apply for New York State personal income tax purposes, except as
otherwise specifically provided in this Article or where such Federal rules and definitions
are clearly inconsistent with and inapplicable to the provisions of this Article.
Section 171.2 of the Regulations provides:

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An employer is any person or organization qualifying as an employer for Federal
income tax withholding purposes and maintaining an office or transacting business within
New York State, whether or not a paying agency is maintained within New York State.
(See also Part 177 of this Article with respect to designation of third parties to perform
acts required of employers.)
Section 3401(d) of the Internal Revenue Code (IRC) provides, in part:
Employer. For purposes of this chapter, the term “employer” means the person
for whom an individual performs or performed any service, of whatever nature, as the
employee of such person, except that –
(1) if the person for whom the individual performs or performed the services does
not have control of the payment of the wages for such services, the term “employer”
(except for purposes of subsection (a)) means the person having control of the payment of
such wages, . . .
Section 3402(a)(1) of the IRC provides, in part:
Except as otherwise provided in this section, every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in accordance with
tables or computational procedures prescribed by the Secretary. . . .
Section 31.3401(c)-1 of the Treasury Regulations defines the term employee and
provides, in part:
(a) The term employee includes every individual performing services if the
relationship between him and the person for whom he performs such services is the legal
relationship of employer and employee. . . .
(b) Generally the relationship of employer and employee exists when the person
for whom services are performed has the right to control and direct the individual who
performs the services, not only as to the result to be accomplished by the work but also as
to the details and means by which that result is accomplished. That is, an employee is
subject to the will and control of the employer not only as to what shall be done but how
it shall be done. In this connection, it is not necessary that the employer actually direct or
control the manner in which the services are performed; it is sufficient if he has the right
to do so. The right to discharge is also an important factor indicating that the person
possessing that right is an employer. Other factors characteristic of an employer, but not
necessarily present in every case, are the furnishing of tools and the furnishing of a place
to work to the individual who performs the services. In general, if an individual is
subject to the control or direction of another merely as to the result to be accomplished by

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the work and not as to the means and methods for accomplishing the result, he is not an
employee.
Opinion
In determining whether the Therapists are independent contractors or employees for
purposes of withholding tax under section 671 of the Tax Law, section 171.1(b) of the
Regulations requires an examination of the Therapists’ classification under federal employment
tax provisions. An individual is an employee for federal employment tax purposes if the
individual has the status of an employee under the usual common law rules applicable in
determining an employer-employee relationship. (See Internal Revenue Service Revenue Ruling
87-41, 1987-1 CB 296.) Guidance for determining that status is found in Treasury Regulations
section 31.3401(c)-1.
Treasury Regulations section 31.3401(c)-1 provides that generally the relationship of an
employer and employee exists when the person or persons for whom the services are performed
have the right to control and direct the individual who performs the services. This control refers
not only to the result to be accomplished by the work, but also the means and details by which
that result is accomplished. It is not necessary that the employer actually control or direct the
manner in which the services are performed; it is sufficient that the employer has the right to do
so.
The right to control or direct the means and details of the work is the primary factor in
determining whether the relationship of employer and employee exists. As an aid to determining
whether an individual is an employee under the common law rules, Internal Revenue Service
Revenue Ruling 87-41, supra, contains 20 factors or elements that have been identified as
indicating whether sufficient control is present to establish an employer-employee relationship.
The factors are designed only as guides for making such determination. The degree of
importance of each factor varies depending on the occupation and the factual context in which
the services are performed. The 20 factors are:

1. Instructions
2. Training
3. Integration
4. Services Rendered Personally
5. Hiring, Supervising and Paying Assistants
6. Continuing Relationship
7. Set Hours of Work
8. Full Time Required
9. Doing Work on Employer’s Premises
10. Order of Sequence Set
11. Oral or Written Report

12. Payment by Hour, Week, Month

13. Payment of Business and/or Traveling
    Expenses

14. Furnishing of Tools and Materials
15. Significant Investment
16. Realization of Profit or Loss
17. Working for More Than One Firm at a
    time
18. Making Service Available to General
    Public
19. Right to Discharge
20. Right to Terminate

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Under the common law rules, a determination whether the Therapists are independent
contractors or employees for purposes of withholding tax cannot be determined simply by
looking at the job title. In making a determination, the entire relationship between Petitioners
and the Therapists must be considered. Pursuant to section 31.3401(c)-1 of the Treasury
Regulations, individuals subject to control or direction as to the result to be accomplished by the
work and also the means and methods for accomplishing the result are considered employees for
purposes of withholding tax.
In this case, each Therapist must submit weekly progress notes measuring advancement
against short-term and long-term objectives. The Therapists must submit progress reports to
Early Learning, which Early Learning then monitors. Early Learning provides supervision and
direction to the Therapists to ensure compliance with certain standards. Early Learning
supervises the means and methods used by the Therapists. Early Learning specifies the hours
that the Therapists work and directs to whom the Therapist will provide services. Lastly, all
relationships can be terminated by either party at any time, and all Therapists must attend “in­
service” training sessions.
Accordingly, the Therapists are subject to sufficient control and direction by Early
Learning as to the result to be accomplished and also the means and methods for accomplishing
the result to be considered employees under section 171.1 of the Regulations for purposes of
New York State withholding tax under section 671 of the Tax Law. Since Diagnostic has control
of the payment of wages to the Therapists, Diagnostic is the employer of the Therapists for
purposes of section 671. See section 3401(d)(1) of the IRC and section 171.2 of the Regulations.
As an employer making payment of wages to the Therapists, Diagnostic must deduct and
withhold tax from such wages for each payroll period.

DATED: June 30, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are limited to the facts set
forth therein