There are four common types of employment relationships recognized by the Internal Revenue Service. These relationships are:
- an independent contractor;
- a common law employee;
- a statutory employee; or
- a statutory nonemployee.
An Independent Contractor
Individuals who follow an independent trade, business or profession, are generally not employees. This category includes lawyers, contractors, subcontractors, accountants, auctioneers, and others who offer their services to the general public. The general rule of thumb is that an individual is an independent contractor if the employer has the right to control or direct only the result of the work and not the means and method used to accomplish the result.
Common Law Employee
Under the old common law rules, every individual who performs services that are subject to the will and control of an employer, as to what must be done and how it must be done, is an employee. The University's faculty and staff are in this category.
If there is an employee relationship it makes no difference how it is described. Consequently, it does not matter if the employee is called an employee, agent or independent contractor. It does not matter how the payments are measured, how they are made, or what they are called. Also, it does not matter if the employee is full-time, part-time or is hired only for a short period.
Two of the usual characteristics of an employer-employee relationship are that the employer has the right to discharge the employee and the employer supplies the tools and a place for him/her to work. In an employee relationship it does not matter whether the individual is employed full-time or part-time and there is no distinction between classes of employees, i.e., managers, supervisors or other types of personnel.
A statutory employee is an individual who works for an employer but is not an employee within the meaning of a common law employee as described above.
Examples include someone paid on commission, full-time life insurance sales agents and full-time traveling or city salespersons. This employment relationship is generally not applicable for the University. If additional information is needed concerning this type of employment relationship, the Office of Accounting Services should be contacted.
This category includes direct sellers, licensed real estate agents, and certain companion sitters. This employment relationship is generally not applicable for the University. If additional information is needed concerning this type of employment relationship, the Office of Accounting Services should be contacted.
Other Stipulations for the Use of Independent Contractors
- Contracted service fees from federal funds may not be paid to a full-time employee of the federal government.
- Services to be provided are essential and cannot be provided by persons receiving salary support in the area of responsibility.
- A selection process has been completed to secure the most qualified individual available, considering the nature and extent of services to be required.
- The charge/cost is appropriate considering the qualifications of the independent contractor, his/her normal charges, and the nature of the services to be provided.
- Transportation and subsistence will be the responsibility of the independent contractor.(In those situations where it would not be practical for the contractor/honorarium recipient to include expenses in the contract, the contract will lay out the terms for expense reimbursement to comply with state policies.)
- Full-time University and other state employees are not authorized to be paid consultant or contractual fees using a contractual payment request by the University unless exempt from this provision. This restriction also applies to corporations and partnerships in which an employee of the University or faculty member serves as either a principal or employee. Issues involving conflict of interest are subject to state criminal statutes.
Tax Reporting and Withholding Requirements
a.Tax Reporting – U.S. Residents
Independent contractors will be sent a Form 1099-MISC at the end of the calendar year if the payment(s) made during the year aggregate to more than the current amount reportable to the Internal Revenue Service (currently $600.00). Backup withholding is required if the independent contractor does not furnish the University with a Taxpayer Identification Number.
b.Nonresident Withholding – An individual or entity that does not RESIDE in N.C.
A 4% North Carolina withholding tax is required for personal services compensation paid to a nonresident individual or entity for certain services performed in North Carolina. This tax withholding requirement includes U.S. citizens and Foreign Nationals.
The reference website is http://www.dornc.com/faq/wh_nonres.html. Withholding is only required if the personal services provider is paid or is expected to be paid more than $1,500 during the calendar year. The personal services subject to withholding are limited to personal services in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program.
To be exempt from the withholding, a corporation or limited liability company must submit a copy of their Certificate of Authority from the NC Secretary of State and the state issued identification number. The contractor can also provide a copy of the contractor's federal determination letter of tax exemption or a letter of tax exemption from the NC Department of Revenue.
Independent contractors that are considered Foreign Nationals must provide necessary information (copies of visa and passport, tax ID number – Individual Taxpayer Identification Number (ITIN) or social security number (SSN), eligibility for any tax treaties, etc.) in order to determine if the University can enter into a contract with the contractor and if any federal withholding tax would be applicable (typically 30%). Contractors that fall into this category will be issued Form 1042-S.