Occasionally, departments may need to enlist the assistance of independent contractors in the course of fulfilling their mission and goals. Correct worker classification protects the University and the person with whom the University is contracting from tax penalties or audit issues. If you plan to hire an independent contractor, review what tax requirements apply before any work begins. 

Worker Classification

In order to know how payments are made and how taxes must be reported, first a worker must be correctly classified as either an employee or an independent contractor. Misclassification can result in significant penalties, so if in doubt, ask for guidance before making a payment commitment.

Broadly speaking, the difference between an employee and an independent contractor falls to who controls what and how work is completed:

  • Employee: A worker is an employee when the University has the right to control the work, even if the worker is given some flexibility or the job title suggests otherwise
  • Independent Contractor: A worker is an independent contractor when they are self-employed and provide services to the University. Even if the university requests results, the contractor generally decides how work is carried out.

Worker classification is not always simple, but the Internal Revenue Service (IRS) provides different tests to help determine the correct status.

Determining Classification

Under Section 530 of the Revenue Act of 1978 (as amended by the Small Business Job Protection Act of 1996), a worker may be treated as an independent contractor if all of the following are met: 

  • Reasonable basis: The university must be able to prove it reasonably relied on one of the following “safe harbors”:  
    • Prior audit results 
    • Federal tax court decisions 
    • IRS rulings to the University 
    • Other solid evidence that supports treating the worker as an independent contractor. 
  • Substantive consistency: All workers who perform similar roles must be treated the same way. 
    • That is, when classifying a worker as an independent contractor, the University must treat all similar workers as independent contractors. 
  • Reporting threshold: ˿Ƶ must file Form 1099-MISC for all contractors who earn $600 or more in a calendar year. 

This is a simplified overview to help you understand the key concepts. For additional information, consult the page. 

To decide whether a worker is an employee or an independent contractor, the IRS looks at the overall working relationship. The key question is how much control the University has versus how much independence the worker has. 

To help evaluate, the IRS established a 20-Factor Test (IRS Revenue Ruling 87-41), however not every factor applies in every case, and no single factor is enough to determine status. The factors are grouped into three main categories: 

  • Behavioral control: Does the University have the right to direct how the work is done? 
    • Independent contractors usually decide when, where and how they complete their work. 
    • Employees typically experience step-by-step supervision; required training on University methods and direction over day-to-day tasks. 
  • Financial control: Is the worker running an independent business
    • Independent contractors typically are seen investing in their own equipment or tools; paying their own business expenses; offering similar services to other clients; being paid by the project or deliverable; earning a profit or risking a loss.  
    • Employees are more likely to be paid hourly or by salary and to rely on University-provided resources. 
  • Relationship of the parties: How does the relationship function in practice, regardless of what any contract says?
    • Employees usually have an ongoing, open-ended relationship and receive employee-type benefits (such as leave or ongoing internal training)  
    • Independent contractors are typically hired for a specific project or time period. 

Visit the IRS website to learn more about how it considers , and when determining whether a worker is an employee or independent contractor.  

Extra caution is required when deciding whether a current or former University employee can be paid as an independent contractor. In many cases, these workers should remain paid as employees. 

The IRS views an ongoing work relationship as a sign of employee status. Before classifying a current or former employee as a contractor, consider whether: 

  • The worker was previously paid as an employee to perform essentially the same type of work. 
  • ˿Ƶ pays other workers as employees to perform similar tasks. 

If either is true, employee classification is likely required. 

Tax Requirements for Independent Contractors

Once a worker is correctly classified as an independent contractor, specific tax rules apply to payments.

  • Taxpayer Identification Number (TIN): ˿Ƶ must have a valid TIN on file before processing payment (usually collected via Form W-9).
    • If there is no TIN on file, the IRS requires the University to withhold 31% of payment as backup withholding. 
  • Form 1099-MISC: ˿Ƶ will file a Form 1099-MISC for any contractor paid $600 or more in a calendar year, reporting total payments to the IRS and to the contractor.
  • Travel and Gift Expenses: ˿Ƶ does not need to keep detailed records, even if the University reimburses the expense.
  • Entertainment Expenses: Protocol varies depending on whether the contractor reports the expense to the University:
    • Expenses Reported: ˿Ƶ must keep records that show the details of each expense. 
    • Not Reported: ˿Ƶ may pay entertainment costs as part of the contract total. If the contractor is not required to document those expenses to the University to receive payment, the University does not need to keep detailed records of the entertainment expenses.

Additional Resources