The Internal Revenue Code governs how payments to individuals for personal services should be made. Non-compliance with these regulations can result in significant monetary penalties. This policy will assist you in complying with IRS requirements; however, new and unusual situations frequently present themselves. If you are in doubt about how to apply this policy to a situation, it is advisable to contact the Treasurer’s Office, the Controller’s Office or the International Student Services Office before contracts or agreements are signed and before payments are due.
An independent contractor is an individual who performs services according to his or her own methods without being under the control of the University except with respect to the desired results or outcome. The IRS applies certain criteria to determine whether or not an individual may be treated as an independent contractor. The University can determine whether your situation meets the criteria of an independent contractor when you complete the Contractor Status Questionnaire (Form TR-1). This questionnaire must be completed and attached to your request for a Personal Services Contract (Form A-127).
As a very general guideline, independent contractors would perform services that are not being performed by, or that could not be performed by, University employees. More specifically, independent contractor payments typically include those to experts in specialized fields hired to work on a specific project and those to professionals such as artists, guest lecturers, performers, photographers.
As a general guideline, independent contractor status would be denied for an individual performing work that is being performed by, or could be performed by, University employees. This work is usually under the University’s direction and control, performed primarily in the University’s facilities, and will continue whether or not the individual continues to render services. Examples include clerical work and instructors teaching an entire credit course.
If independent contractor status is denied for the work being performed or the individual who would provide the services, two options exist. First, the individual can be paid through the payroll system as an employee. In this case, contact Human Resources. Alternatively, the individual could be hired through a payrolling agency. Refer to the Payrolling Agency section of this policy.
Based on several of the IRS criteria for independent contractor status, the University generally limits personal services contracts with an individual to one year in length and $20,000 in amount. In addition, vice presidential approval is required.
Depending on the type of services being rendered, there are several options for paying individuals under contract. These are described in the following sections.
To make a one-time payment or payment for services rendered at a one-time event, the Limited Services Engagement is most appropriate. Complete the Limited Services Engagement Form (AP-10) and attach it to a Recommendation for Payment (Form A-114). Send these forms to the Accounts Payable Office.
Honoraria are considered payments under a limited services engagement. Although honoraria are frequently paid for services that are also provided by employees, the services usually require short periods of time (one week or less) and are one-time payments (like those for speakers or guest lecturers).
The recipient’s travel expenses are sometimes paid as part of, in lieu of, an honorarium. Payment for travel expenses may be requested on a single Recommendation for Payment (Form A-114). If original receipts and other appropriate documentation are attached to support the travel expenses, the Form A-114 must include separate (split) coding for the honorarium and the travel expenses. The travel expenses will not be included in taxable compensation.
If original receipts are not provided for the travel expenses, the entire payment should be coded as an honorarium and will be reported as taxable compensation to the recipient.
Services beyond a limited engagement should be evidenced by a contract. The contract should be specific as to scope of work, period of performance and total contract amount. Avoid using generic terms such as “consultant” or “technical assistant” to describe the individual or the scope of work.
Complete the Personal Services Contract (Form A-127) along with the Contractor Status Questionnaire (Form TR-1). Prior to the start of work, send both of these forms to the Treasurer’s Office for review and approval.
When contractor status is denied, hiring the individual through a payrolling agency is an option. The Purchasing Office has negotiated contracts with certain payrolling agencies (See the Variant section of this manual). Payrolling agencies charge for providing this service.
To use a payrolling agency, complete a purchase requisition and a temporary payroll services request. The temporary services request form can be obtained from Purchasing and requires vice-presidential approval. Upon approval of the request by your vice president, Purchasing will issue a purchase order. The Purchasing Office can answer specific questions about payrolling agencies.
Payments to international visitors, or non-resident aliens, are governed by the Internal Revenue Service and the U.S. Department of Immigration and Naturalization. The tax issues are complex and the required documentation is extensive. Before engaging non-resident aliens to perform personal services, contact the International Student Services Office (ISSO) or refer to the International Visitors Guide.
Once approved by the International Student Services Office, these payments are processed like limited engagements. The Limited Services Engagement Form for International Visitors, which can be obtained from the ISSO, is the preferred form for requesting payment for services rendered by an international visitor. An Exemption from Withholding on Compensation (IRS Form 8233) must accompany requests for paying international visitors.