Employee vs. Independent Contractor

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

2. 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 $600 or more 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.

3. 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.

4. 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.

5. Actual cases • From Keep Up To Date on Accounts Payable: A California based company was charged with misclassifying a group of its employees as independent contractors. The end result was $11 million in penalties. This company had employees and independent contractors handling many of the same tasks. The court found that the company didn’t do enough to clearly distinguish between the two positions. • Also from Keep Up To Date On Accounts Payable: • A task force in New York found 20,200 instances of workers treated as IC’s, representing more than $282.5 million in unreported wages. • In Connecticut a 12-month audit reclassified 3,487 workers and uncovered $68.2 million in unreported wages. • Last year, Massachusetts identified 5,491 misclassified workers, carrying a $46 million dollar price tag of unreported wages.

6. 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.

7. 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 is doing any type of work that exhibits characteristics of the previous employee/employer relationship, he/she 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 him/her as an independent contractor, he/she will need to be paid as an employee.

8. 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.

9. Teaching vs. Guest lecturer • If the individual is presenting information covered in a UGA course syllabus, it is teaching. • If the individual is the primary instructor in a department course being offered for academic credit towards a university degree, it is teaching and should be paid through Payroll. • If the individual is the primary instructor in a non-credit adult continuing education course offered by UGA, 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.

10. Examples

11. Examples 1 & 2 • Example 1: A graduate assistant on payroll in Chemistry plays the violin at a Terry College reception. This individual can be classified as 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 should be paid via Payroll. Since the individual is an employee for the School of Music and the activity is related to music, the IRS would likely view this as relating to the individual’s employment with UGA.

12. Examples 3 & 4 • Example 3: An individual gives a presentation in Genetics. He was 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 returned to briefly help with a project in History. This individual would need to be paid through Payroll.

13. Examples 5 & 6 • Example 5: 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 6: 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 can be paid through Accounts Payable as an independent contractor.

14. Example 7 • A current UGA employee who has a training business of his own, with a 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, the payment should be processed through Payroll. Also, for this particular example, the employee should be made aware of the Conflict of Interest Policy since he is planning on providing services to UGA through his company. • CIP: Single transaction does not exceed $250.00 and the aggregate of all transactions does not exceed $9000.00 per calendar year. • CIP Policy: http://www.policies.uga.edu/FA/nodes/view/1018

15. “Real-Life” Exercises • The School of Music has an Education Program Specialist that is going to serve as a performer in the School of Music’s opera production of Magic Flute. The individual will be paid $300.00 for services. This individual should be paid through Payroll. He/she is currently active on Payroll and the services being performing are related to the employee/employer relationship.

16. “REAL-Life” exercises • An individual will be paid $500 for services rendered during research sample collection. The individual is also currently active on Payroll as a Student Assistant in the Oglethorpe Dining Hall. Payment should be made through Accounts Payable. Duties being performed are not relatable to the current employee/employer relationship.

17. “Real Life exercises” • Genetics sends through a check request for $200 to pay an individual for collecting 3 kudzu samples while in China. The individual is on payroll as a student worker for the library. This payment can be processed through Accounts Payable as there is no relation to the services being paid for on the check request and the services that the individual provides as an employee for UGA.

18. Making payments via payroll • HR requirements • Contact HR liaison to determine if position needs to be posted. • If posting is not required, a hiring proposal and background check for non-posted positions must be submitted. • HR will contact Budgets if the posting has been waived. • Submit personnel with non-benefit status • If a set fee has been negotiated, the payment should be made on the monthly payroll. • If the employee is being paid an hourly rate, he should be set up in the Kronos MyTime system and paid on the hourly payroll. • Employee must be paid in accordance with the Fair Labor Standards Act. • If posting has been waived, enter note in remarks section of personnel.

19. Making Payments via Accounts Payable • Complete Honoraria form found at http://www.busfin.uga.edu/forms/f210.pdf • Log into the Electronic Check Request System at https://webapps.ais.uga.edu/PCFA/index.jsp • Complete the check request information, upload Honoraria form as a digital attachment. • Submit the request for approval.

20. Retired individuals • UGA policy at http://www.policies.uga.edu/FA/nodes/view/1182/Employment-Beyond-Retirement • UGA retirees and their hiring units are responsible for understanding BOR Policy 8.2.8.3-Employment Beyond Retirement. http://www.usg.edu/hr/manual/employment_beyond_retirement/m%26 • Requests must be approved by the President prior to employment of the retiree. • TRS Retirees: UGA cannot enter into an agreement with any employee prior to his/her last day of employment. • http://www.busfin.uga.edu/forms/uga_usg_retirees.pdf

21. Questions to consider: • Does this individual currently work for UGA as an employee? • Will UGA hire this individual immediately following the termination of his/her services as an independent contractor? • During the 24 months prior to the date on which the services commenced, was the individual on UGA payroll? • Will the individual perform work using University facilities? • Will the individual perform research for a University faculty member under an arrangement whereby the UGA faculty member serves in a supervisory capacity? • Will the individual serve in an advisory or consulting capacity under a UGA faculty member or director in a “collaboration between equals” type arrangement? • Does the individual routinely provide the same or similar services outside of UGA to the general public as part of a continuing trade or business? • Will the department provide the individual with specific instructions regarding the performance of the required work rather than rely on the individuals expertise and/or provide significant supplies and equipment for the worker? • Does the individual engage in entrepreneurial activities in an established business at risk for loss? • Does the individual have his/her own insurance for work related injuries?

22. 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. • Julie Camp (jcamp@uga.edu) • Jennifer Collins (jfinch@uga.edu)