Payments for "Other Professional Services"

I. OVERVIEW SECTION

A. Introduction

According to IRS regulations, when you engage an individual (entity) to provide professional services, also know as, "Independent Personal Services" for The University, you must first determine whether the service provider should be classified as an employee of the university or as an independent contractor. Proper classification of a service provider ensures that The University is in compliance with the following: Fair Labor Standards Act, Immigration and Naturalization Service regulations, and IRS statutes regarding income tax, unemployment insurance tax, and Social Security and Medicare taxes. Improper classification may result in penalties to The University, and the responsible unit may be required to absorb the costs.

To determine whether the individual or entity can be paid as an Independent Contractor please refer to the Determination Procedures Section of this document. Note: certain types of payments may be processed without further consideration of independent contractor versus employee status. For additional information refer to Section II B, Circumstances Where "Determination Procedures" are not Required.

Click here to view information on the other types of IRS reportable non-salary payments such as Honoraria, One-Time Lecture, Rent, Legal Fees, Medical Services, Research Subject Fees and Royalty payments.

B. Definitions

An Independent Contractor is an individual who was hired to perform a specific PROFESSIONAL SERVICE. Some common examples would be architects, freelancers, entertainers, caterers, etc. He/she is the master of his or her own time. Usually a contractual relationship exists whereby the independent contractor is responsible for all aspects of the means and methods of the job. He/she is fully liable for any job related actions and is not eligible for employee benefits.

C. List of Individuals who cannot be paid as Independent Contractors

  • Employees and Recent Former Employees -- If the service provider you wish to hire is a current or recent former employee (previous 12 months), he or she will usually be paid as an employee and not as an independent contractor, especially under the following situations:
    • When the service provider will be working exclusively for the university
    • When the service provider will be routinely performing a service similar to one presently being performed by another university employee
    • When an employee of the university is seeking to provide similar services elsewhere in the university.

    Exception to Rule: Special Interest "Hobby Payments" -- Payment to an employee for an activity, which could be considered a hobby or recreational vocation. Cannot be related to the regular duties performed by the employee at the university. Whenever in doubt, contact the Payroll Department prior to discussing and/or negotiating payment terms with the service provider.

  • Registered University of Chicago Students

  • When the individual (service provider) will be working exclusively for The University
  • Individuals or entities that have been "debarred or excluded" from doing business with the federal government -- As a recipient of federal funds The University of Chicago may not contract, purchase, or make payments to a vendor or party (person or independent contractor) that has been identified as debarred, suspended, or excluded from doing business with the Federal Government. For additional information please refer to the following Central Procurement Services web page on Debarred or Excluded Vendors.

  • Individuals providing Secretarial, Clerical, Housekeeping or Wait staff services
  • Individuals who are providing instruction or teaching services -- Since education is one of the University's primary missions, IRS would always view these types of payments as employment. For additional information please refer to Policy guidelines for paying individual's who are performing Teaching or Instructional services.
  • Citizens of Other Countries -- Individuals who do not have Resident Alien status (i.e. an individual who does not have an Alien Registration Receipt Card ("Green Card")) cannot work as Independent Contractors. Exceptions to this rule are: (1) TN VISA holders, (2) professional entertainers, and (3) performers. If you are requesting "independent contractor" services from an individual who is not a U.S. Citizen and who does not have a "Green Card", contact the Office of International Affairs.

D. Payments for Services Performed in Foreign Countries

  • US Citizens or US Resident Aliens -- According to IRS regulations, services performed by a US Citizen or US Resident Alien in a foreign country are both taxable and reportable. For example, if a US Citizen performs a service for your department while in France The University would be required to report the individual's income and present the worker with an IRS Form 1099MISC if the total dollar amount paid in a calendar year exceeded $599.

  • Nonresident Aliens -- According to IRS regulations, payments to Nonresident Aliens are neither taxable nor reportable provided that ALL of the services were performed by the individual outside of the United States. For example, if a French citizen performs a service for your department in any foreign country, the individual will not receive any IRS tax documents from The University regardless of the amount paid to the individual.

E. Other Types Specialized IRS Reportable Professional Service Payments

There are a number of specialized professional service payments that can be paid to individuals. Each has its own set of rules and documentation requirements.

F. Required Reporting to the Internal Revenue Service

In accordance with federal tax regulations, Independent Contractors/Consultants who are paid $600 or more during a calendar year will be issued an IRS 1099MISC, Statement for Recipients of Miscellaneous Income form. A record of these payments will also be electronically transmitted to the Internal Revenue Service.

By law, individuals who are paid as Independent Contractor/Consultants are responsible for reporting all additional income earned and for paying the appropriate federal and state taxes, as well as, self- employment tax. They are also required to make estimated quarterly tax payments.

II. DETERMINATION PROCEDURES SECTION

A. Factors Used to Determine whether an Individual Can Be Paid as an Independent Contractor rather than an Employee

The IRS has recently expressed concern that many corporations are incorrectly classifying employees as consultants and independent contractors and, as a result, are failing to pay substantial amounts of employment taxes. Therefore, it is extremely important to carefully examine payments to consultants and independent contractors to determine if our institution has properly classified all individuals who are providing services to the University.

The primary method used to determine whether an employee-employer relationship exists in a work situation is the IRS "common law" test. Under this test, an individual is considered an employee if the employer has the right to control both the results of the work and the means by which the end result is achieved. If an employer has the right to control or direct only the result of the work -- and not how it is done - then the individual qualifies as a consultant/independent contractor.

The IRS lists a number of factors that must be considered in determining an individual's work status. In each case it is important to consider all the factors. However, if an individual meets all the conditions as discussed in the following four factors it can be reasonably expected that the individual can be properly classified as a consultant/independent contractor.

Whenever an individual's work status may be in doubt, the payroll department should be contacted prior to making any commitments. The final decision concerning whether an individual can be classified as a Consultant/Independent Contractor or Employee resides with the Payroll Department working in conjunction with the Office of Legal Counsel.

The individual who is providing the services will be required to answer the following questions listed on the Consultant & Independent Contractor Questionnaire.

Question 1 - Employer's right to control

Does the University have the right to control how work is to be performed?  

YES
or
NO




IF YES, the individual must be considered an employee. Contact University Human Resource Management.

IF NO, contact continue to Question 2.

Factor
Employee
Independent Contractor

Control

Under this test, an individual is considered to be an employee if the employer has the right to control both the results to be accomplished and the method or means by which the work or services is to be performed.

An employee is required to comply with instructions about when, where and how to work. The instructions may in the form of manuals or written procedures that show how the desired result is to be accomplished. In some instances an employer may allow an individual considerable freedom in deciding how to do a particular job and may work with little, if any, instructions because they are highly proficient and conscientious workers. However, even if no instructions are given, the control factor is present if the employer has the right to give instructions.

An independent contractor decides how to do the job to accomplish the desired results, establishes his/her own procedures, and is not supervised. The entity engaging his or her services is only interested in the end result.

 

Question 2 - Set Hours of Work

Does the individual set his or her own hours of work?

YES
or
NO




IF YES, continue to next question.

IF NO, the individual must be considered an employee.

Factor Employee Independent Contractor
Set Hours of Work A requirement that the individual adhere to a set of work hours established by the employer is viewed as a factor of control. An independent contractor is the master of his or her own time.

 

Question 3 - Offers Services to the General Public/Will Not Receive Majority of Income from Single Source (The University)

Does the individual make his or her services available to the general public, and therefore will not receive majority of income from The University?

YES
or
NO




IF YES, continue to next question.

IF NO, the individual must be considered an employee.

Factor Employee Independent Contractor
Offers Services to General Public If an individual performs services for a single entity, does not advertise his or her services to the general public, does not hold licenses and performs services for an organization on a continuing basis, it is an indication of an employment relationship. The availability of services to the general public on a "regular or consistent basis" usually indicates independent contractor status. This may be evidenced by the individual having his or her own office, maintaining listings in telephone directories or advertising in newspapers, journals, magazines, etc.

 

Question 4 - Training

Does the University provide training?

YES
or
NO




IF YES, the individual must be considered an employee.

IF NO, continue to next question.

Factor Employee Independent Contractor
Training Training of a worker by an experienced employee, by correspondence, by attending instructional sessions or training courses, by required attendance at meetings or by other methods is a factor of control indicating that the employer wants the services performed in a particular manner. This is especially true if the training is given at frequent intervals. An independent contractor uses his or her own method(s) to accomplish the desired results and receives no training from the purchaser of the services. He or she is not required to attend meetings.

The common law test can be difficult to apply to all cases or situations. Based on the previous four questions, even if the individual appears to meet the Independent Contractor test, in some cases, other factors or characteristics of the work may also have to be taken into consideration to determine whether an employee-employer relationship exists. The following is a list of the other factors that the IRS would focus on when auditing the University. None of these factors, standing alone, are necessarily controlling or decisive.

Financial Control Factors

  • Risk of profit or loss -- Independent contractors typically can invest significant amounts of time or capital in their work without any guarantee of success -- i.e., they realize a profit or sustain a loss based on their success in performing the work or service. When workers are insulated from loss or are restricted in the amount of profit they can gain, they usually are classified as employees.
  • Investment in facilities -- Individuals are likely to be treated as independent contractors if they have a significant investment in facilities and tools they use in the course of performing services (e.g., an office rented at fair market value from a third party).
  • Payment of business or travel expenses -- Employer payment of an individual's business or work-related travel expenses generally indicates employee status.

Relationship of the Parties Factors

  • A continuing relationship -- Employees usually are hired for a continuing, indefinite period. This generally applies even to work or services performed on an irregular but recurring basis, as well as to part-time, temporary, and seasonal work. The relationship between an independent contractor and employer, on the other hand, usually ends when the job is finished.
  • Personal services required -- Employee status is suggested if an individual is required to personally render the services in question, IRS says, because such an arrangement indicates that the employer is interested in controlling the methods used to accomplish the results. By contrast, an individual's right to substitute another's services without the employer's knowledge suggests the existence of a contractor relationship.
  • Integration into the business -- The fact that an individual's services are so integrated into an employer's operations that the success or continuation of the business depends on the performance of the services generally indicates that the individual is subject to a certain amount of control by the owner of the business.
  • Control over the hiring, supervising, and paying of assistants -- An employer that hires, supervises, and pays an individual's assistants usually is viewed as controlling the work (and the individual performing the services) in question. On the other hand, individuals who hire, supervise, and pay other workers in accordance with an arrangement in which they have agreed to provide the labor needed to attain a certain result generally are treated as independent contractors.
  • A full-time work requirement -- Employee status is suggested if an individual must work on a substantially full-time basis for the employer since this indicates that the employer controls the amount of time the individual spends working and thus essentially restricts the worker's ability to perform for someone else. By contrast, independent contractors typically are free to work when and for whom they choose.
  • Working on the employer's premises -- Performance of the work on the employer's premises may be viewed as evidence of employer control, especially if the work could be done elsewhere. While performance at an off-premises site demonstrates some freedom from employer control, it does not by itself mean that the worker is an independent contractor. According to IRS, the importance of the work-on-premises factor "depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises.
  • Payment by the hour, week, or month -- Employees generally are paid by the hour, day, or month, while independent contractors typically are paid by the job or on a lump sum or straight commission basis.
  • Working for more than one firm -- Individuals who perform services for a number of businesses or people at the same time usually are considered independent contractors. IRS cautions, however, that "a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement."
  • Employer's discharge rights -- If an employer has the right to discharge an individual, that worker is viewed as an employee. Independent contractors, on the other hand, cannot be fired as long as they perform in accordance with their contract specifications.
  • Worker's termination rights -- Employees typically can end their employment relationship at any time without incurring liability, whereas independent contractors might be liable for a breach of contract if they leave without completing their work.

B. Circumstances Where "Determination Procedures" are not Required

Certain types of payments may be processed without further consideration of independent contractor versus employee status.

  1. If the service provider is incorporated (organized as a corporation under state law). This information will be found on the W-9 form that was filled out by the entity. Note; even if an individual has a Federal Employer Identification Number (FEIN) it does not necessarily mean that they are incorporated.
  2. Certain professional firms or partnerships such as accounting firms, architectural firms, engineering firms and legal firms.
  3. Professors and/or Medical Doctors from other educational/medical institutions providing consulting services.

III. PAYMENT PROCEDURES, REQUIRED FORMS AND SUPPORTING DOCUMENTATION SECTION

Any independent contractor service must be justified as essential. Selection of an individual should be based on a process, which attempts to secure the most qualified individual(s) available. For sponsored agreement accounts, documentation of the process of selection of an individual is the responsibility of the principal investigator, and is usually a part of the application process. For all other budgets, documentation of the process of selection of an independent contractor is the responsibility of the department head.

For all cases, compensation must be shown to be appropriate both for the advice provided and for the qualification of the individual, taking into consideration prevailing charges for similar circumstances and the compensation policy of the University.

The following forms and documentation should be submitted directly to the Payroll Department, Independent Contractor Section.

Required documents for all individuals, including Permanent Residents and TN VISA holders are:

  1. Direct Payment Voucher Comptroller Form 88R with instructions on completing the form.
  2. IRS Form W-9, Request for Taxpayer Identification Number (US Citizens and Permanent Resident only).
  3. The University of Chicago Debarred Vendors and Excluded Parties Certificate of Compliance Form with debarment procedures and current debarred vendors.
  4. A copy of the contract or letter of agreement between The University and the Individual.
  5. Copy of Vendor Invoice.
  6. Consultant & Independent Contractor Questionnaire. Note: This form is not required for the following types of payments:
    • If the service provider is incorporated (organized as a corporation under state law). This information will be found on the W-9 form that was filled out by the entity.
    • Certain professional firms or partnerships such as accounting firms, architectural firms, engineering firms and legal firms.
    • Professors and/or Medical Doctors from other educational/medical institutions providing consulting service

Additional forms that are required for Permanent Residents and TN VISA holders are:

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