Employee vs. Independent Contractor Jennifer Collins, Manager, Accounts Payable Julie Camp, Manager, Payroll

What is An independent contractor? An independent contractor is a person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal and physical agreement. USG Definition: An individual who performs services for the institution where the institution has the right to specify the result to be accomplished by the work, but not the means and methods by which the result is to be accomplished. In the United States, any company, or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service using Form 1099-MISC. This form is a report of monies paid as independent contractors do not have income taxes withheld from their pay as regular employees do.

What is an employee USG: An individual who performs personal services for the institution where the institution has the right to control and direct the individual who performs the services, not only as the result to be accomplished, but also as to the details and means by which that result is to be accomplished. It is not necessary that the institution actually direct or control the manner in which the services are performed; it is sufficient to establish an employee-employer relationship that the institution has the right to do so.

Consequences Misclassifying workers as independent contractors can cause substantial tax issues as well as penalties for failing to pay employment taxes and failing to file required tax forms.

How can you determine how to classify? Three characteristics viewed by IRS: Behavioral Control-Whether or not UGA has a right to direct or control how the work is done through instructions, training, or other means. Financial Control- Whether or not UGA has a right to direct or control the financial and business aspect of the worker’s job. Type of Relationship-How the workers and business owner perceive their relationship.

Internal Revenue service In September 2009, IRS announced its intention to conduct an employment tax National Research Program beginning in 2010. Employment tax audits focusing on worker classifications. Penalties can be severe. UGA could be liable for employment taxes, interest, penalties, and retroactive benefits. Penalties may also be imposed for failure to file required tax forms. According to the December 20, 2010 edition of The Chronicle of Higher Education, the IRS stated that it is increasing its scrutiny of colleges. Included in this increased attention is the issue of employment taxes and whether or not these taxes are being deducted from all eligible employees. The IRS has brought this up for numerous years and called it a point of emphasis.

UGA interpretation UGA is conservative in approach to the issue. The final cost and potential negative publicity can be significant. The IRS has emphasized this topic for years. If the individual has been on payroll before (not a specific time period) and are doing any type of work for the same department that they were previously employed in, they should be paid through payroll. Teaching is an employee function (we will discuss the different between a guest lecturer and teaching in an upcoming slide.) If the individual was on payroll immediately before or after the event that you wish to pay them as an independent contractor, they will need to be paid as an employee.

Examples

Examples 1 & 2 Example 1: A graduate assistant on payroll in Chemistry plays the violin at a Terry College reception. This individual is likely an independent contractor (and can be paid through Accounts Payable) for this event. Example 2: In contrast to the previous example, a graduate assistant in the School of Music plays the violin at a Terry College reception. In this case, the individual would need to be paid via Payroll. Since he is an employee already for the School of Music and the activity is related to music, the IRS would likely view this as relating to their employment.

Examples 3 & 4 Example 3: An individual gives a presentation in Genetics. He had been employed by UGA previously as a research assistant in Genetics. This individual should be paid through Payroll. Example 4: A lecturer who was previously employed by UGA in the History department but terminated earlier this year returns to briefly help with a project in History. He would need to be paid through Payroll for his brief return.

Examples 5 & 6 Example 6: An individual is engaged to perform services during Summer 2013 for Terry College. The department in Terry intends to hire this person as a faculty member in the Fall of 2013. This person must be paid through Payroll for the Summer 2013 services. Example 7: A faculty member here at UGA serves as the Editor for a journal and utilizes the services of an Assistant Editor who lives in California. The Assistant works independently editing articles sent to her electronically. She sets her own hours, works from home, and provides similar services for other clients. This person should be paid through Accounts Payable as an independent contractor.

Example 10 A current UGA employee who has a training business of his own, with its own Federal ID number wants to teach a continuing education course for UGA. He is currently on payroll as a faculty member. Since the payment is for teaching a course, it should be through Payroll. Also, for this particular example, the employee should be made aware of the Conflict of Interest Policy also since he is planning on providing services to UGA through his company.

Teaching vs. Guest lecturer If the individual is presenting information covered in a UGA course syllabus, it is teaching. If the individual presents multiple times at a specified time, then the individual should be treated as an employee. Typically, guest lecturers are individuals who possess an advanced knowledge of a particular subject area, and who speak about that subject area to a group or organization with which he/she is normally not involved. The purpose of the arrangement is generally to enrich a course through the inclusion of relevant, specialized knowledge which that course’s normal lecturer does not possess. True guest lecturers can be paid through Accounts Payable as an independent contractor.

Conclusion If you are not sure how the individual should be classified, contact Accounts Payable or Payroll! It is easier for us to discuss with you up front then to handle it once you’ve already submitted a check request that can’t be paid. Jennifer Collins (jfinch@uga.edu) Julie Camp (jcamp@uga.edu) Bob McGee (rmcgee@uga.edu)