PAYING FOR SERVICES (INDEPENDENT CONTRACTORS/CONSULTANTS)

Volume 3, Financial Management 
Chapter 5, Paying for Services
Responsible Executive: Vice President for Financial Affairs and University Controller
Responsible Offices: Disbursement Review & Tax
Issued: March 1996
Revised: March 2003
Errors or changes? Email us.

CONTENTS

REASON FOR POLICY

ENTITIES AFFECTED BY THIS POLICY

WHO SHOULD READ THIS POLICY

RELATED DOCUMENTS

CONTACTS

DEFINITIONS

OVERVIEW

Introduction

DECISION FLOW CHART

PROCESSING STEPS

General Information
Steps

SPECIAL TOPICS

Conflict of Commitment/Conflict of Interest
Contracts
Inquiries by Government Agencies
Insurance
Joint Ventures
Misclassification: Risks and Costs
Payments Exempt from Independent Contractor Review
Sponsored Project Consulting Agreements and Subcontracts
Tax

RESPONSIBILITIES

FORMS AND CONTRACTS

1. Independent Contractor Questionnaire
2. Independent Contractor Checklist
3. Certificate of Insurance
4. Cornell University Office of Sponsored Programs Request to Engage a Consultant
5. Independent Contractor Agreement
6. Entertainment Contract - General
7. Vender Info Request Form

APPENDIX A: IRS GUIDELINES

Introduction
"20-Factor Test"

APPENDIX B: SERVICES EXEMPT FROM INDEPENDENT CONTRACTOR REVIEW

Introduction

POLICY STATEMENT

REASON FOR POLICY

ENTITIES AFFECTED BY THIS POLICY

• All Units of the University

WHO SHOULD READ THIS POLICY

• All employees who engage individuals or entities to perform services, process transactions related to the services, authorize charges, or manage overall risk for the university.

RELATED DOCUMENTS

CONTACTS

Direct any general questions about University Policy 3.5, Paying for Services (Independent Contractors/Consultants) to your unit's administrative office. If you have questions about specific issues, call the following offices:

Table 1
Contacts

DEFINITIONS

OVERVIEW

Introduction

The procurement of services, unlike the procurement of goods, requires an evaluation of whether a service provider should be classified as an employee or independent contractor. This evaluation and classification must be performed before engaging an individual or entity to perform services, and before any services begin. It must be based upon IRS guidelines (see the "Appendix A" Section of this document), not on administrative ease or relative costs.

There are costs and risks associated with each classification. For employees, there are employer's share of FICA tax, employee benefits, workers' compensation and other insurance coverage, overtime premiums, etc. For independent contractors, there are contract costs as well as potential penalties and interest from the IRS and other regulatory agencies if the agency, during its review, reclassifies the independent contractor as an employee.

If you need additional information before engaging an individual or entity to provide services, contact your unit human resources representative or unit financial administrator, who will work with central university offices to obtain any guidance needed by the unit.

Caution: The unit engaging the service provider has primary responsibility for independent contractor review, and may be held financially responsible for any taxes, interest, or penalties due to misclassification.

DECISION FLOW CHART

Note: Answer these questions before submitting an independent contractor questionnaire to the service provider.

Flow Chart

PROCESSING STEPS

General Information

 - Independent Contractor Questionnaire: unit remits form to service provider to obtain general information about his/her business activities;

- Independent Contractor Checklist: unit completes form to evaluate independent contractor status;

- Vendor Information Request Form: Office for Purchasing Services remits form to new vendors to obtain information required in the vendor file;

- Contract: unit enters into written contract with independent contractor. A purchase order issued by the Office for Purchasing Services constitutes a written contract (see the information on contracts in "Special Topics").

Steps

The unit is responsible for completing the following steps unless an office identified in the "Contacts" Section of this document is responsible for the service (e.g., architectural, engineering, etc.) or the service is identified as exempt from unit level review in "Appendix B" of this document.

1. Submit an Independent Contractor Questionnaire to service provider for completion (see "Forms") and request its return directly to you.

2. After receipt, complete Independent Contractor Checklist to determine whether to reject or accept independent contractor status (see "Forms").

3. If the unit accepts independent contractor status, procure services in accordance with Purchasing Policy #205.

4. If the unit rejects independent contractor status, appoint as an employee through the Office of Human Resources using a University Personnel Action Form (UPAF).

5. Whether the unit accepts independent contractor status or not, sign and fax the completed Independent Contractor Questionnaire and Independent Contractor Checklist to the Office for Purchasing Services, for purposes of record retention (fax: 607-255-9450).

Note: The unit should review a service provider's classification prior to entering an initial contract or renewing a contract. The unit should make its own determination, and not rely on another unit's determination.

SPECIAL TOPICS

Conflict of Commitment/Conflict of Interest

The unit administrator is responsible, in consultation with the Office for Purchasing Services, for reviewing issues related to conflict of commitment and conflict of interest (see the "University Conflicts Policy" for more information).

Contracts

A contract establishes the mutually agreed-upon terms and conditions of the transaction, between the service provider and the university. The table below directs you to the appropriate office for different kinds of contracts.

Table 3
Responsibility for Service Contracts

Inquiries by Government Agencies

All inquiries made directly to your unit by a government agency about independent contractors must be directed to the Office of Tax Compliance for response. Units must not answer these inquiries.

Insurance

The unit administrator is responsible, in consultation with Risk Management and Insurance, for ensuring that the independent contractor carries adequate insurance.

Note: Risk Management requires proof of liability insurance for all caterers. Those caterers with current insurance coverage are identified on the Risk Management Web Page http://www.risk.cornell.edu/catererlist.asp.

Caution: A service provider may be required to submit proof of liability insurance before a contract is signed. For more information, contact Risk Management and Insurance.

Joint Ventures

Misclassification: Risks and Costs

The common risks associated with incorrectly classifying a service provider as an independent contractor are:

- Penalties assessed by the IRS and state taxing authorities for failure to withhold FICA taxes, federal income taxes and state and local income taxes. Penalties can be assessed against Cornell even when the service provider fully paid his/her tax obligations.

- Penalties assessed by state unemployment agencies and workers' compensation boards.

- Penalties assessed by Department of Labor and other regulatory agencies

- Lawsuits filed by independent contractors asserting negligence for injuries, contract disputes, etc.

The costs associated with classifying a service provider as an employee are employer FICA, employer benefits, workers' compensation other insurance costs, and suits and grievances.

Note: If in doubt on classification, first consult your unit human resources representative and/or your unit financial administrator. For more information, contact the Office of Risk Management and Insurance and/or the Office of Tax Compliance.

Payments Exempt from Independent Contractor Review

"Appendix B" provides information on a limited number of payments that are exempt from independent contractor review and can be paid by voucher. All voucher payments require a contract except for a guest lecturer or a subject fee. Units must use the contracts developed by University Counsel (see "Forms"). The language of the contract should not be changed without authorization from University Counsel or the Office for Purchasing Services. The contract must be signed by both the service provider and a university representative with the appropriate transaction authority.

Sponsored Project Consulting Agreements and Subcontracts

OSP has been delegated the responsibility for approval of "sponsored project consultants" and "subcontracts" (see the "Definitions" Section of this document).

Caution: This delegation of responsibility applies only to service providers with highly specialized expertise directly related to the science or scope of the sponsored project and whose fees are charged to the sponsored project or to a cost sharing account.

The Office of Sponsored Programs generally does not require completion of the independent contractor questionnaire. This office does, however, retain the right to review the status of service providers.

Contact the Office of Sponsored Programs for processing information related to sponsored consulting agreements, subcontracts, and contracts charged to cost sharing accounts.

Tax

The university must report payments to independent contractors of $600 or more during a calendar year on IRS Form 1099-MISC.

Caution: Any business expenses you agree to include in the contract should be paid as a component of the invoice. Do not process an expense/travel reimbursement for the independent contractor. Do not attach expense receipts to an independent contractor's invoice.

The independent contractor is responsible for the following:

- all estimated tax payments and other tax filing requirements;

- all tax records, original business receipts, etc.;

- general liability and other insurance coverage for workers who work on his/her contract with Cornell;

- medical insurance, personal accident insurance, pension plan, or other benefits, whether personal or extended to his or her employees. 

RESPONSIBILITIES

FORMS AND CONTRACTS

Table 5
Forms and Contracts

Form	USE	URL
1. Independent Contractor Questionnaire	Service provider completes.	http://www.payments.cornell.edu/New_Vendors.cfm
2. Independent Contractor Checklist	Unit management completes and signs.	http://www.payments.cornell.edu/New_Vendors.cfm
3. Certificate of Insurance	Documents adequate insurance coverage for independent contractors.	http://www.policy.cornell.edu/finance_forms.cfm
4. Cornell University Office of Sponsored Programs Request to Engage a Consultant	Provides information necessary for the engagement of an independent contractor functioning under an OSP consulting agreement or subcontract.	http://www.osp.cornell.edu/Forms/Consultant/
5. Independent Contractor Agreement	Establishes terms and conditions. Caution: A copy of the agreement should be attached to voucher payments.	http://www.payments.cornell.edu/Contracts2.cfm
6. Entertainment Contract - General	Establishes terms and conditions for entertainers hired by units. Note: The "plain vanilla" contract should not be used for major, public entertainment events held at places such as Bailey Hall, Statler Auditorium, etc. Contact the Office of University Counsel for assistance with contracts related to these events. Caution: A copy of the contract should be attached to voucher payments.	http://www.payments.cornell.edu/Contracts2.cfm
7. Vender Info Request Form	A substitute W-9 developed by the Office for Purchasing Services to obtain vendor information that the university must maintain in its records.	http://www.payments.cornell.edu/New_Vendors.cfm

APPENDIX A: IRS GUIDELINES

Introduction

Service provider classification is based on facts and circumstances; no one fact determines service provider classification. The IRS currently emphasizes three broad categories: behavioral control, financial control, and the overall relationship. These categories are directly related to the "20-factor test" described in IRS Revenue Ruling 87-41.

Behavioral Control
Independent contractors determine how they will accomplish the task. If Cornell provides training and/or instructions about how to complete the task, the service provider should generally be classified as an employee.

Financial Control
Independent contractors have significant investments in their businesses. A service provider who works at home generally does not have a significant investment in the business.

Relationship
Independent contractors have a broad customer base. If the service provider works primarily for Cornell, the service provider should generally be classified as an employee.

Note: Research universities often require reports, presentations, and/or reviews by experts not employed at Cornell. An expert has specialized knowledge directly related to the science and scope of a project. Although they generally don't operate businesses, they qualify as independent contractors because Cornell does not control their activities. If an expert's costs are charged to a sponsored project, a sponsored project consulting agreement is required.

"20-Factor Test"

The factors contained in the IRS "20-Factor Test" are summarized below.

An independent contractor generally

- sets the sequence of tasks needed to accomplish the work. The university has no right to set this sequence;

- is subject to the instructions outlined in the contract, but is not instructed by the university about when, where, and how to work;

- furnishes his/her own tools, materials, and the like;

- may hire and supervise others to assist in the completion of the work. The decision to hire assistants is within the control of the independent contractor and in no way affects his/her remuneration;

- bears all business expenses associated with the performance of the work, including insurance, travel, meals and lodging;

- is in a position to realize a profit or suffer a loss as a result of his/her services;

Note: A service provider paid by the hour is not in a position to realize a profit or loss; he/she is merely compensated for time and effort. If the service provider is subject to a real risk of economic loss due to significant investments or bona fide liability for expenses, such as salary payments to unrelated employees, these factors indicate the service provider is an independent contractor.

- cannot be discharged if the contract specifications are being met;

- cannot terminate the service contract with the university without incurring a liability;

- makes his/her services available to the general public (outside the university community). This may include hanging out a "shingle," holding a business license, advertising a service, or providing a listing of his/her business telephone;

- is not providing services that become integrated into the day-to-day operations of the university;

- is free to work when, for whom, and for as many firms as he/she chooses and is not required to work full-time for any one employer. There should be no agreement of exclusivity with the hiring firm;

- chooses working hours at his/her discretion. When the work is performed on university premises, the independent contractor may be required to function within certain hours, but need not be present at any specific time;

- is paid a fixed fee;

- does not have a continuing relationship with the university. Services may be considered continuing although they are performed at irregular intervals, on a part-time basis, seasonally, or over a short-term;

- is not required to work on university premises;

- is not subject to training by the university and uses his/her own methods to accomplish the work.

APPENDIX B: SERVICES EXEMPT FROM INDEPENDENT CONTRACTOR REVIEW

Introduction

The transactions below are exempt from independent contractor review.

We recommend procuring services through APPS, although voucher payments may be permitted for these transactions.

Caution: Units are responsible for determining that transactions do not create conflict of interest or commitment, insurance coverage is adequate, and payments for subject fees comply with all regulations related to human subjects.

Notes

- Honoraria, permission fees; post-doctoral training grant stipends, prizes, royalties and rent are not payments for services.

- All services must be intermittent to qualify for exemptions on this matrix.

- Caterers always require insurance coverage, even if low dollar (see http://www.risk.cornell.edu/catererlist.asp for authorized caterers).

- Some specialized services require the unit to work with the office identified in the "Contacts" Section of this document prior to procuring any services (e.g., architectural and engineering services, construction contracts, etc.).

Table 6
Services Exempt from Independent Contractor Review

* For caterers, a purchase order is required if cost exceeds $10,000.