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Many questions arise from the issue of Independent Contractors at the University of Chicago. This is an important issue to address since the University pays approximately 10,000 individuals and organizations to provide consulting and other short-term or limited services to the University. Your department might be contracting the services of a contractor right now.

It is essential to make the distinctions between employee versus independent contractor for the purposes of determining the tax obligations and tax liabilities of the university as an employer. It is especially crucial when determining the University's tax withholding and income reporting obligations. Per the withholding provisions of federal tax laws, there are no withholding requirements on payments made to independent contractors who are citizens or resident aliens even though such payments constitute taxable income and must be reported to the Internal Revenue Service.

What is the difference between an employee and an independent contractor? The employment status of an employee versus an independent contractor may be contrasted by the different relationship each has toward his employer:


An employer-employee relationship exists when the individual or organization for whom the services are provided has the right to direct and control the process and result of the work.


An employer-independent contractor relationship exists when the individual or organization for whom the services are provided does not have the right to direct and control the process and result of the work. In addition, independent contractors make their services available to the general public.

This means that a worker who is required to comply with his/her employer's instructions about when, where, and how he/she is to work is ordinarily an employee. Thus, if a worker must work certain hours set by the University, and/or a university employee has the right to dictate exactly how the worker performs those services - "I want you to do Job X, using Tools Y, at the location Z." - then that person is considered an employee of the University of Chicago.

It does not matter if the employer allows the worker considerable freedom in deciding how to do the particular job at issue, what matters is whether or not the employer has the right to dictate exactly how the person performs those services - the order, the sequence, the methods or tools used, etc.

An independent contractor in contrast usually determines his/her own hours and formulates the methods or strategy with which he/she accomplishes the job assignment. Generally, the higher the level of expertise and specific knowledge required of a person, the more likely that the person may be considered an independent contractor - i.e. attorney, architect, engineer, etc. Independent contractors have business expenses as a result of making their services available to the general public: they have special advertising and telephone directory listings; they hang out a "shingle"; they hold business licenses and/or possess a Federal Employee Identification Number for tax purposes; etc. (For a complete check list of business characteristics, see Sec. I.A.).

This guide deals specifically with Independent Contractor Payments and other IRS reportable payments at the University of Chicago. It aims to explain the difficult legal issues involved in determining the status of independent contractors. It also aims to explain the various procedures to process payments for independent contractors, including form samples. This manual is divided into four sections:

I. Determining a Worker's Employment Status explains the test used to determine who can be an independent contractor or employee. It also lists the various    workers at the university who can and cannot receive pay through the Independent Contractor payment system.

II. Other IRS Reportable Payments Processed Through the Independent Contractor Payment System. This section describes the other categories of payments that must be reported to the IRS.

III. Independent Contractor Payments describes the various procedures and forms necessary for payment for independent contractors.

IV. Payments to Alien (Non-U.S. Citizen) Individuals explains the forms that non-U.S. citizens must complete for payment as independent contractors.

V. IRS Forms Used to Report Miscellaneous Income provides a short explanation of the university's tax reporting obligations and describes the tax forms that independent contractor payment recipients will receive from the university at calendar year end.

This manual is intended as a general policy guide for Independent Contractor Payments. Should you have any specific comments or questions concerning Independent Contractor payments, please contact the Payroll Department Independent Contractor Desk at 5-9941 or 2-1953.