Establishing Employment Relationships
[Policy] Last Updated: June 04, 2010
Employment is the normal means to engage and compensate an individual for providing any sort of service or work product for the University. Another format is through an independent contractor status, which is a very specific and limited form of ‘contract for services’ relationship. Institutional compliance with several federal and state guidelines pertaining to employment relationships is mandatory. The following policy must be recognized and followed by employing departments to properly establish and verify that employment relationships are consistent with federal and state regulations.
It is important that the university pay each individual appropriately so that we can accurately report earnings to the Internal Revenue Service. The Internal Revenue Service scrutinizes the returns of individuals who receive both a W-2 (employee record of earnings) and a form 1099 (independent contractor record of payment) for the same calendar year from one employer. They also scrutinize the returns of individuals who received a W-2 for a prior year and then receive a Form 1099 for the next calendar year from the same employer. Therefore, if an employing department hires an individual to perform a service or work product and that individual is a current employee or has previously been employed by Northern Illinois University within the past two years, then that individual must be paid through the standard payroll process as an employee of the University.
The IRS has provided a list of 20 common law factors to assist in determining whether the individual is an employee or an Independent Contractor. The essence of these 20 factors is summarized in the following four questions:
- Does this individual provide essentially the same service as an employee of the University?
- Has the individual previously been paid as a University employee to perform essentially these same tasks?
- Does the University have a right to control how, where, and when the individual will perform or accomplish the service?
- Will the individual supervise or direct University employees as part of the service provided?
If the answer to any of these four questions is yes, then the individual is considered to be an employee and must be paid through the HRS Payroll process.
If you are using a standard engagement agreement or whenever contracting for services that establishes the terms and conditions for a service-related contract for an individual, you must first make sure that the individual can be paid as an independent contractor. Please refer to the Independent Contractor Questionnaire to assist in determining whether an individual might qualify to be considered as an independent contractor. The Independent Contractor Questionnaire incorporates the twenty common law factors in an easy yes/no question format, affording a thorough review of the employment relationship resulting in an appropriate designation of either independent contractor or employee status. If a work for hire situation does not qualify to be considered as an independent contractor, then the individual must be employed as a university employee and paid through the standard payroll process. This will be the usual outcome. Please remember that in most cases a current or former employee will not qualify as an independent contractor.Certified Work Statement for each service-related contract for any individual, prior to the performance of the service. These completed forms must be attached to any standard engagement agreement/contract used and sent with the requisition to Procurement Services or the check request to Accounts Payable for their review and signature. This will insure our compliance with all regulatory standards in this regard. The Certified Work Statement is the official result of the Independent Contractor Questionnaire and authorizes either Procurement Services or Accounts Payable to complete the payment processing. Check requests or requisitions not accompanied by a Certified Work Statement will be forwarded to Human Resource Services for their review and analysis of the assignment and employment relationship, thereby possibly delaying finalization of the defined work assignment or service.
There are penalties for misclassifying an individual service provider. Employers are legally required to pay Federal Insurance Contribution Act (FICA), Federal Unemployment Tax Act (FUTA), and Federal/State withholding taxes on the wages of workers classified as employees. If the Individual is classified as an Independent Contractor, the employer is not responsible for employment-related taxes. Non-employee compensation is reported on Form 1099 to the IRS. If an individual provider is determined by the IRS to be an employee instead of an independent contractor, the employer is responsible for paying any taxes that should have been withheld but were not, including Federal income tax, Social Security tax (both the employer's and the employee's share), and Medicare taxes, plus interest and penalties.
Under IRC Section 6651(a), the civil penalty for failure to file is 5% for each month, or a part of a month of delay, not to exceed 25% in the aggregate. If the failure to file a return extends for more than 60 days, the penalty for failure to file may not be less than the smallest of $100 or 100% of the tax due. Therefore, if the University fails to file the requisite forms for individuals who should have been classified as employees, a civil penalty will be assessed against the University. The initiating department will be responsible for the payment of any penalties or back taxes.
Please note that this policy pertains specifically to individuals who are employed or contracted to perform a service or work product for the University. This policy does not apply to employing departments seeking reimbursement for employee expenses considered ineligible under other University policies.
Questions about determining Independent Contractor status should be directed to Human Resource Services at 753-6000, Keith Jackson, Controller at 753-8416, or Norden Gilbert, University Counsel at 753-8365.