The university processes expenditures for personal services of individuals and business entities through one of two methods – employee appointments via the payroll system or contractual services via purchase orders or contracts. This is to provide guidance to departments in selecting between these two methods to ensure appropriate treatment for tax purposes.
All payments for personal services are considered taxable income to the recipient. If an employer-employee relationship exists, the payments are considered wages subject to federal withholding tax and applicable FICA contributions. Wages are reported annually to the IRS and individual on Form W-2. If no employee-employer relationship exists, then the payee is considered to be an independent contractor. Independent contractors are individually responsible for remitting quarterly estimated income tax payments and self-employment (SECA) tax contributions. Payments to most independent contractors in excess of $600 are reported annually on IRS Form 1099-MISC (Form 1099-NEC beginning with 2020 reporting).
There is no statute or regulation that defines who should be an employee or who should be an independent contractor. The IRS and the Courts rely on common law principles to make this determination. These principles include but aren’t limited to an evaluation of the degree of behavioral and financial control exercised by the university and the payee. Because the facts and circumstances of each transaction are different, no particular common law principles have greater weight than others; although the IRC instructs the IRS to take into consideration the understanding of both parties about the nature of the business relationship.
Prohibition of Dual Classification
IRS regulation 31.3402(e)-1 suggests that an individual not receive both wages and independent contractor compensation during the same period of time from the same employer. For purposes of administering this prohibition, the university is using the calendar year as a measure of this period of time. This means that an employee should not receive both a W-2 and a 1099 from us for the same calendar year. Exceptions to this rule must be approved by both Purchasing and Tax Services who will evaluate all of the facts and circumstances.
Department Responsibilities and Administrative Review and Oversight
Generally, the IRS has no issue with individuals who are paid taxable and reportable W-2 wages. The problem almost always arises when individuals who should be paid as employees are classified inappropriately as independent contractors. These people can usually be easily identified, because they don’t have a bona fide business that is properly registered with the State and City and will be paid under their own social security number. Departments should work carefully with the Purchasing Department before classifying these people as independent contractors. The Purchasing and Controller’s Offices reserve the right to make the final worker classification determination.
Vendor Files and 1099 Forms
Disbursement Services maintains the vendor address and W-9 files in Omni Financials. That office also issues the university’s 1099 forms in January each year. If you need vendor file editing or have questions about 1099 forms, that office’s contact representative is Carla Daniels (firstname.lastname@example.org)