Mott Community College Independent Contractor Policy and Procedures

Introduction Many Mott Community College departments regularly employ the services of individual(s) to perform varying services. These arrangements often raise questions on the status of the individual, such as “Should they be classified as an employee or an independent contractor?”

Purpose These procedures are intended to: To ensure compliance with Board Policy 5005 Independent Contractors; Provide information about the distinction between employees and independent contractors; Provide a checklist for determination; Provide examples of contracts for an independent contractor; and Ensure/provide procedures for proper recordkeeping and tax reporting.

Definitions Employee: An individual who performs services that are subject to the will and control of an employer – both what must be done and how it must be done. The employer can allow the employee considerable discretion and freedom of action, so long as the employer has the legal right to control both the method and the result of the services. Independent Contractor: An individual or entity engaged to perform services and commonly referred to as a consultant, freelancer, contractor, etc. The service provider is responsible for the means and methods for completing the job based on specification in the contract. The service provider is not supervised or controlled by MCC. Contract: A legal agreement that established the rights and duties of the contracting parties and enables each party to seek a remedy for the breach of those duties.

Risk of Misclassification of Independent Contractors The importance of demonstrating that payments to individuals are for independent contractors and not employee services is the possible tax liability to MCC. If the IRS determines that payment should have been made as an employee and not an independent contractor, MCC could be liable for all taxes that should have been withheld and were not; including federal income tax, social security tax (both employer’s and employee’s share) and Medicare taxes, plus interest and penalties.

Calculation of Tax Assessment and Penalty Example: An independent contractor paid $90,000 during 2005. Form 1099 was filed with the IRS, and the misclassification is deemed: Unintentional MCC would owe approximately $10,000 Intentional MCC would owe approximately $62,000 These figures do not include interest which is generally 9% compounded daily!!

Steps to Classification Determining the correct classification is not an easy task. The classification must be based on IRS guidelines using the Twenty Rule Common Law Test located on page 5 of the Independent Contractor procedures. In addition, the flowchart on page 14 will assist in the process. Complete Employee/Independent Contractor Questionnaire on page 11 of Independent Contractor procedures. Complete Independent Contractor/Employee Status Form on page 10 of Independent Contractor procedures. Complete a draft of the contract using the checklist on page 15 and samples provided in Attachment A of the Independent Contractor procedures. Submit above items to Human Resources for an approved determination.

Steps After Approval of Determination Finalize contract for approval by President, Vice-President, or CFO. Submit a completed W-9 form to Purchasing for vendor set up. Submit the final signed contract to Accounting. Establish a BPO in Datatel for an amount not to exceed the contract amount. Monitor compliance and performance of terms, amending the contract if necessary. Submit invoices for contractor payment following established Accounts Payable procedures. Adjust BPO upon completion of contract.

Additional Guidelines Full-time, salaried employees of the College who may be asked to serve as consultants for other College departments are not entitled to receive additional compensation for performing such services when those extra duties fall within their area of professional expertise. This is true even when the work is conducted during an employee’s “own time” or outside of normal business hours. Such assignments are considered part of the job for which the employee is already compensated. College employees who incorporate, and who in turn provide services to the College that are related to their primary job assignment will not be classified as independent contractors solely because they have incorporated.

Is this employee an independent contractor in this situation? Example #1 An employee of the IS department is asked to consult on a software purchase for the Health Sciences department. The employee asks to do this during non regular work hours and wants to be paid as an independent contractor as he has his own business. Is this employee an independent contractor in this situation? NO This work falls within the employee’s area of professional expertise and is part of the job for which he is already compensated.

Should this employee be paid as an independent contractor? Example #2 A Business Division faculty member is going to teach a Continuing Education class in watercolor painting. Should this employee be paid as an independent contractor? NO Teaching is their area of professional expertise and they would be paid as an employee.

Can this employee be paid as an independent contractor? Example #3 An employee from the Accounting department is going to teach a class in accounting. Can this employee be paid as an independent contractor? YES As long as all other requirements for independent contractor status are met, teaching is not the employee’s area of professional expertise and he may be paid as a contractor.

References This procedure will be in effect July 1, 2006. This presentation, the policy document, and the sample contracts will all be available on the Accounting website. Questions can be directed to: Ethel Mason Accounting Supervisor 762-5533 Kate Schamanek HRServices – Supervisor 762-0497