Why are we required to go through the pre-approval process for independent contractors?
The IRS is concerned about reporting services on Form 1099 rather than on Form W-2 because wages are subject to withholding that is not required with services that are reported on Form 1099.
Improper reporting carries significant penalties:
|Type of Penalty||Amount of Penalty|
|Failure to File Form W-2||$270 each|
|Failure to withhold income tax||1.5% of wages, plus interest|
|Failure to withhold Medicare tax||40%|
|Failure to pay Employer's share of Medicare tax||100%|
|Failure to pay tax||.5% for each month up to 25% of total tax liability|
The HR process is set up to review and document any relationship where the income is reported on IRS Form 1040 Schedule C. Examples include sole proprietors, single member LLC's who are disregarded for income tax purposes, and DBA's (individuals who have a name for their business). Going through the process will help avoid penalties and interest that occur when services should have been reported on Form W-2.
All academic and administrative units are required by policy to notify HR prior to contracting with any individuals both inside or outside the United States. Individuals from units that engage in services with an independent contractor, whether inside or outside the United States, without engaging in this process may be personally liable for any payments due.
How do I know how a business is operated?
There is no way for you to know unless you ask "will this payment be reported on an individual income tax return?" If yes, they you will need to go through the approval process.
But the business has an EIN (Employer Identification Number)?
We hear this often but having an EIN is not an exception to the process. Individuals may have an EIN but still report the income on an individual tax return. If we need to send a tax form at the end of the year, we can use the EIN but the process is still required.
What is required for a foreign visitor?
Non-US citizens could require reporting and tax withholding at 30% therefore we need to take extra care to appropriately mark the boxes for US or not US or permanent resident.
For permanent residents or greencard holders, we ask that they either provide a copy of the front side of the greencard or provide a W-9.
If the services are rendered outside of the US, then we ask for a Taxpayer Identification Number Certification (TINC). In that case, we do not need anything further because it is not reportable to the IRS.
In some cases you know when you engaging with a foreign visitor, such as a speaker who is flying here to speak or provide other services but you may not know the status of someone who is traveling from another school or location within the United States. We have a foreign visitor information sheet that the individual needs to complete and return to email@example.com. If you do not, tax and treasury services will reach out to you after you submit the request for approval. We work in conjunction with HR so that the approval will be made only after tax review.
If you have any questions on the process, please e-mail firstname.lastname@example.org – we would be happy to help you through the process.