Mott Community College. Independent Contractor Policy and Procedures

Transcription

1 Mott Community College Independent Contractor Policy and Procedures

2 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: 1. To ensure compliance with Board Policy 5005 Independent Contractors; 2. Provide information about the distinction between employees and independent contractors; 3. Provide a checklist for determination; 4. Provide examples of contracts for an independent contractor; and 5. Ensure/provide procedures for proper recordkeeping and tax reporting. Responsibilities Departmental: 1. Complete and submit for review an Independent Contractor Status Form, Employee/Independent Contractor Questionnaire and Draft copy of Independent Contractor(s) Contract to Human Resources Department. 2. After approval of status determination, finalize the Contract for approval by President, CFO, or Vice President. 3. Submit to Purchasing Department a completed IRS W-9 form. 4. Submit to Accounting a signed copy of the finalized contract. 5. Establish BPO in Datatel for amount not to exceed the contract following established BPO guidelines. 6. Submit amendment to contract, if necessary, following procedure for original contract. 7. Monitor compliance and performance of terms. 8. Submit for payments to independent contractor following established Accounts Payable procedures. 9. Work with contractor to ensure proper and timely reporting, recordkeeping and tax reporting. 10. Adjust BPO upon completion of a contract amendment. Human Resource Department: 1. Review submitted Independent Contractor Status Form. 2. Make determination as to correct status. 3. Approve or reject form. 4. Return determination to requesting department. Purchasing Department: 1. Establish new vendors using completed IRS W-9 Form. Accounting Department- Accounts Payable 1. Maintain database of Independent Contractors 2. Process payment when approved request for payment has been received. 3. Issue 1099 to Independent Contractor. 2

3 CONTENTS Overview 4 Risk of Misclassification of Independent Contractors 4 Definitions 4 Twenty Rule Common Law Test 5 Guidelines 7 Independent Contractor Determination 7 Contract 8 Payment of Contract 9 Independent Contractor/Employee Status 10 Employee/Independent Contractor Questionnaire 11 IRS W-9 13 Flow Chart 14 Independent Contractor Contract Requirements 15 Independent Contractor Contract Sample Attachment A 3

4 Overview The determination as to whether an individual is an employee or an independent contractor is essential. The procurement of personal services, unlike the procurement of goods, requires an evaluation of how the service provider will be paid. This document provides guidance and tools to help in the correct classification of service providers. The classification must be based on IRS guidelines, using the Twenty Rule Common Law Test (page 5), and not on administrative convenience or relative costs. Risk of Misclassification of Independent Contractors The importance of demonstrating that payments to individuals are for independent contractor and not employee services is the possible tax liability to Mott Community College. If the IRS should subsequently determine that the payment should have been made as an employee and not as an independent contractor, Mott Community College could be liable for all taxes that should have been withheld and were not, including federal income tax, social security tax (both the employer s and employee s share) and Medicare taxes, plus interest and penalties. 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 Mott Community College. Contract: A legal agreement that establishes the rights and duties of the contracting parties and enables each party to seek a remedy for the breach of those duties. IRS Form 1099 MISC: A form used to report to the IRS and the taxpayer various types of payment including non-employee compensation to independent contractors. IRS W-9 Form Request for Taxpayer Identification Number and Certification: A form required by the IRS to be maintained by Mott Community College. The Purchasing Department uses the information provided on the form to establish an individual or entity as a legitimate vendor of the college. 4

5 Twenty Rule Common Law Test FACTORS EMPLOYEE INDEPENDENT CONTRACTOR 1 INSTRUCTIONS Must follow set and/or mandatory rules, where, when and how to perform work. 2 TRAINING Received and/or is required to receive training. 3 INTEGRATION Provides essential services, which meld into overall business operation. 4 SERVICES RENDERED 5 HIRING ASSISTANTS 6 CONTINUING RELATIONSHIP 7 SET HOURS OF WORK 8 FULL-TIME WORK 9 WORK DONE ON PREMISES 10 ORDER OR SEQUENCE SET Required to render services personally. Does not supervise or hire others to complete work assigned. Services are part of a continuing relationship. Required to work set hours. Required to devote full-time to a job on a non-project basis. Required to work on-site, on a route, or at a designated location Require to perform tasks in set manner, routine, schedule. 11 REPORTS Required to submit regular oral and/or written reports where work is evaluated. Follows own individual instructions. Performs work based upon independently established procedures. Skilled professional requiring no training to adequately perform services. Work performed is not an Integral part it is a unique service. Have assistants or employees while retaining the right to hire others to perform the required work. Hires assistants at his/her expense to perform all or part of the project. Provides services and contracts for separate and distinct projects, not on a continuing basis. Retains the right to complete work at any time. Contract specifies what is to be accomplished by what date. Rents/leases location where work is performed. Has full discretion over routine or manner in which to perform services. Has few or no obligations to file regular reports 5

6 12 PAYMENTS Payment by the hour, week, or month in a regular interval. 13 EXPENSES Expenses are paid or reimbursed. 14 TOOLS AND MATERIALS Tool and materials are furnished. 15 INVESTMENT Does not invest in facilities and/or equipment used to perform services. 16 PROFIT OR LOSS 17 WORKS FOR MORE THAN ONE PERSON OR FIRM 18 OFFERS SERVICES TO GENERAL Compensated for services at fixed rate regardless of profitability. Performs services for only one firm at a time, on a nonproject basis. Services are not offered to the general public. PUBLIC 19 RIGHT TO FIRE Can be discharged at any time with no liquidated damages. 20 RIGHT TO QUIT May terminate the relationship at any time. Compensation determined separately by project or based on fixed fee. No reimbursement for out-of-pocket expenses unless as part of contract. Furnishes own tools and materials. Possesses and invests in facilities and equipment to perform services. Shoulders the possibility of incurring a loss and realizing a profit. Has numerous concurrent clients and is not financially dependent on any one. Offers services to the public Cannot be discharged other than for failure to perform the contracted services. May terminate his/her relationship only upon completion of contract or breach of other party. 6

7 Guidelines 1. Obtaining the services of an independent contractor or consultant should be based upon a selection process that attempts to secure the most qualified individual for the assignment. 2. Compensation should be appropriate for the type of advice or service provided and should reflect the skills and qualification of the individual selected to perform the service. 3. 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. 4. 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. Independent Contractor Determination Step 1: Determining Correct Classification Determining the correct classification is not an easy task. The twenty common law factors are intended as a guideline, not as strict rules. The IRS states, The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. Two basic questions should be answered to help clarify the classification: 1. Does Mott Community College pay as employees others who perform essentially the same duties that are to be performed by this worker? 2. Has this worker previously been paid as an employee to perform essentially this same task? A yes answer to either one of these questions means that the worker in question is considered to be an employee, and the Employee/Independent Contractor Questionnaire form is not required. However, if a no answer pertains to either of the questions, proceed to the Employee/Independent Contractor Questionnaire for further clarification. 7

8 Step 2: Completing Necessary Forms If it is determined that the worker may be classified as an independent contractor from the Employee/Independent Contractor Questionnaire, complete the Independent Contractor Status Form and a draft of a contract. Step 3: Send the Completed Forms to the Human Resource Department Send the Independent Contractor Questionnaire, the Independent Contractor Status Form and the draft copy of a contract to the Human Resource Department for determination. Contract An Independent Contractor Contract will vary based on the scope of the project. A written contract states a detailed relationship and outlines the expectations of both Mott Community College and the contractor. It documents the terms and conditions by which independent contractors/consultants are utilized. If the Independent Contractor is funded by a grant, awareness of any/all grant limits must be observed. Attach any necessary grant documentation to the contract. 1. Review the example contract(s) and make any necessary changes. 2. Use the Independent Contractor Contract Check List to prepare the contract. 3. Attach the check list to contract for approval. 4. Once the language of the contract is complete, submit it to the President, Vice President, or CFO for approval. 5. Forward a copy of the final contract to the Human Resource department if materially different from the draft. 6. Once the contract language has been properly approved, obtain the legally binding signatures of all parties. An IRS W-9 Form must be included with the contract. Forward a copy of the signed contract to the Accounting Department. 8

9 Payment of Contract 1. Submit a copy of the IRS W-9 Form to the Purchasing Department for vendor set up. 2. Establish BPO in Datatel for amount not to exceed the contract following established BPO guidelines. 3. Follow established Accounts Payable guidelines for invoice payment. Requirements include entry of vendor invoice detail, manager s approval, and allowing 15 days for check issuance. Note: It is the responsibility of the requesting department to ensure that any amendments to the original contract are executed before additional payments are made to the independent contractor. 9

10 Independent Contractor/Employee Status Form The information provided below will assist Mott Community College in determining whether the individual performing the services will be classified for Federal, State and FICA tax purposes as an employee of Mott Community College, or as an independent contractor. A copy of the approved form will be returned to you, as hiring manager. If the approved form indicates an independent contractor, you must enter a purchase requisition to initiate the procurement action. Once a purchase order number is assigned, notify Accounts Payable to process payments. I have attached the Independent Contractor Questionnaire, draft of contract, and any supplemental information, such as the individual s business card, advertising or business letterhead, which supports the independence of the individual. I understand that the proper status of the worker depends on the manner in which the work is performed and on the nature of the relationship between the worker and Mott Community College personnel responsible for the work being performed. Therefore, the status of the individual for federal employee tax withholding and related reporting purposes will be re-determined when the manner in which the work is performed or the relationship between the individual and Mott Community College changes sufficiently to alter the validity of this certification. I agree to notify the Human Resource Department if the status of the individual changes. I hereby declare that the information provided in this document is true and correct and this I have sufficient knowledge of, authority and responsibility for the work to be performed under this contract to effectively complete the attached form. Department for whom services are to be performed Signature Title Date Phone Number Reviewed by Mott Community College Human Resource Department I certify that I have reviewed the attached Independent Contractor Questionnaire Form and supporting documentation completed by the department named above and based on the results of the completed form: the individual ( ) to be engaged under this contract appears, for federal employment tax withholding and related reporting purposes, to be: An Independent Contractor An Employee Signature Title Date 10

11 Employee/Independent Contractor Questionnaire Name of Independent Contractor: Project Title and Description of Work: Project Begin Date: Project End Date: The common law factor and control test is used as a primary vehicle in making employee/independent contractor determination. Evidence of the individual s classification must be documented in order to support the final determination. Please answer the following questions truthfully and to the best of your knowledge. The final determination will be based on the majority of answers, not on one or two answers only. Submit with Independent Contractor Status Form to Human Resource Department Common Law Factor Y e s N o Characteristics that Lead to Employee Classifications Current Relationship with Mott Community College 1. Does MCC pay as employees others who perform essentially the same duties that are to be performed by this individual? 2. Does this individual currently work for MCC as an employee? 3. During the 12 months prior to the date on which the services commence, was the individual on the MCC payroll (regular or temporary)? 4. Does MCC desire to hire this individual as an employee immediately following the termination of his or her services as an independent contractor? 5. Does this individual currently work as an independent contractor or consultant for MCC? And/or has this individual ever worked as an independent contractor or consultant for MCC within the past 12 months? Behavioral Control 6. Will the individual be trained by Mott Community College 7. Is the individual instructed about when, where and how work is to be done? 8. Will the individual have control over hiring and supervising assistants? 9. Will the individual perform the services personally? Trained by Mott Community College Complies with department s work instructions Cannot hire assistants to perform their work Render services personally Characteristics that Lead to Independent Contractor/Consultant Classification Responsible for own training Determines when, where and how work is performed May hire assistants to perform their work and pay out of contract proceeds May use own employees or subcontractors 11

12 10. Will the individual be required to provide regular progress reports 11. Will the individual perform the services in a prescribed sequence? 12. Will the individual devote a set amount of time to performing services? 13. Will Mott Community College supply the worker with any tools or materials? 14. Does the individual have set hours? 15. Will the individual perform services on Mott Community College s campus? 16. Could the individual realize a profit or loss as a result of the work to be performed? 17. Does the individual have a significant investment in tools or other types of instruments? 18. Does the individual make his or her services available to the general public? Regular progress reports may be required Must follow prescribed sequence Only works for Mott Community College Tools and materials supplied by Mott Community College Hours specified by Mott Community College Provides services on campus Financial Control Cannot realize a profit or loss No investment is work facilities Services are not offered to the general public Progress reports required only if part of contract agreement Sets own pattern or sequence Free to work for other employers Provides own tools and materials Sets own hours May choose where to perform work Can realize a profit or loss Significant investment in work facilities Advertises services to the general public (e.g., business cards,, phone book listing, etc.) 19. Does the individual perform his or her services for more than one business? 20. Is the individual paid by the hour, week, month or assignment? 21. Will the individual be reimbursed for business expenses? 22. Will the individual s services by integrated into Mott Community College s educational or other activities? 23. Is there a written contract that set forth the terms and conditions of the services? 24. Does the individual earn employee benefits from Mott Community College Works for only one business at a time May work for several businesses at the same time Paid on a consistent Paid based on work assigned in and regular basis accordance with contract Reimbursed for Pays own business expenses business expenses Relationship of the Business and Worker Services are fully Services are not fully integrated integrated into Mott into Mott Community College s Community College s business business No contract Earns Mott Community College employee benefits Contract exists Does not earn Mott Community College employee benefits 25. Is the individual incorporated? Not incorporated Incorporated 26. Does the individual have a continuing relationship with Mott Community College Ongoing relationship Temporary relationship 27. Can the individual be terminated at Mott Community College s discretion? 28. Can the individual end his or her relationship with Mott Community College at any time? Generally employed at will, may be terminated at Mott Community College s discretion May quit job without obligation Generally terminated only for material breach of contract Cannot quit until job is completed 12

13 IRS W-9 Form is available on Purchasing Mott Community College web page. 13

14 Does Mott Community College pay as employee others who perform essentially the same duties that are to be performed by this worker? Has this worker previously been paid as an employee to perform essentially this same task? NO YES Complete Employee/Independent Contractor Questionnaire Complete IndependentContractor/Employee Status Form Complete draft of Independent Contractor Contract Include any/all grant documentation if necessary Classified as Employee Submit to HR for Determination Employee HR Employee Processing Independent Contractor Establish Vendor Add to Database Submit Final Contract to President, Vice President, or CFO for approval. Resubmit to HR if materially changed Submit W-9 to Purchasing Department Submit copy of signed contract to Accounting Department Establish BPO for contract amount. Submit invoice to Accounts Payable for payment. Monitor compliance and performance of terms. Ensure proper and timely reporting, recordkeeping and tax reporting. Close BPO at end of contract term. 14

15 Independent Contractor(s) Contract Requirement Check List Use this checklist to ensure that all pertinent items of the contract are present. Attach to front of contact for approval by the President, Vice-President, or CFO. Department Approver Item Engagement start and end date Legal name of Independent Contractor Detail scope of engagement to include but not limited to: Timeframe of project Desired outcome of project Right to inspect progress of work contracted Detail payment terms Statement of independence Intellectual Property Rights (if applicable) Insurance requirements (if applicable) Confidentiality Termination terms Assignment terms Indemnification clause Use of Mott Community College s name Comments: Requesting Department: Name: 15