SECTION 76:  Independent Contractors for U.S. Citizens and Resident Aliens

  Last Updated:  June 2008

I.    Definitions

II.   Determining Employment Status

III.  Independent Contractor  Professional Services Contract (PSC)

IV. Payment Processing

V.  Forms

I. Definitions

1. Contract & Grant Administration (C&GA)

Contract & Grant Administration provides timely, accurate, and courteous assistance to faculty and support staff with the financial and contractual aspects of submitting proposals to external sponsors; and to administer awards according to sponsor and MSU regulations.

2. Employee

   Every individual performing services for the university and compensated by the university is presumed to be an employee unless she/he meets the criteria of Independent Contractor (IC) status. All employees are compensated through MSU’s payroll process.

3. Independent Contractor (IC)

   An individual who performs services, but, by meeting certain criteria, is not classified as an employee. The term "independent contractor" can encompass individuals, partnerships and incorporated or unincorporated companies. An independent contractor is the U.S. citizen or resident alien, company, corporation or individual, who is being hired to perform the work.

4. Invoice Approval Cover Sheet

   This is page 4 of the Professional Services Contract Requisition. This is required for each invoice payment request.

5. Non-Resident Alien

   This is a foreign individual who is not a U.S. citizen or resident alien. When hiring a non-resident alien to perform work, see Manual of Business Procedures Section 77, NONRESIDENT ALIEN (NRA) INDEPENDENT CONTRACTORS AND NRA RECIPIENTS OF HONORARIUM, RENTS, ROYALTIES AND AWARDS for further information on how to contract with and process payments to these individuals.

6. PSC Purchase Order

   This is the Professional Services Contract. It includes the Professional Services Contract Requisition after it has been signed by the Independent Contractor, accepted and approved by Purchasing.

7. PSC Requisition Form

   This is the Professional Services Contract Requisition. It is different from a standard purchase requisition and is referred to as a requisition because it initiates the process for creating a Professional Services Contract. The Professional Services Contract Requisition is required for all Professional Services Contracts (using object code 071 or 072 only) including honoraria and/or where the contract value is greater than or equal to $600.

   
   
8. Tax Identification Number (TIN)
   This is an identification number assigned to employers, sole proprietors, corporations, partnerships, nonprofit associations, government agencies, certain individuals and other business entities by the Federal Government.
   
   
9. U.S. Resident Alien
   This is a foreign individual who is a permanent resident of the U.S. but does not have citizenship and holds a valid green card.

II. Determining Employment Status

Michigan State University must comply with Internal Revenue Service (IRS) regulations in its role as an employer. Failure to do so can result in assessments of taxes, penalties and interest. One university responsibility in this regard is the accurate categorization of workers as either employees or as independent contractors (IC), with the corresponding tax withholding and reporting functions inherent in each category of worker. Categorizing a worker as an IC exposes the university to the greatest amount of risk in this regard, since the IRS assumes that all workers are employees unless it can be documented otherwise.

1. Employee

1. Every individual performing services for the university and compensated by the university is presumed to be an employee unless she/he can meet the criteria of IC status. Generally, every individual who performs services that are subject to the will and control of the university as to both what must be done and how it must be done, is an employee. It does not matter that the university allows the employee considerable discretion and freedom of action, as long as the university has the legal right to control both the method and the result of the services.
   
   

2. University policy requires that the following workers be compensated as employees:
   
   

1. Anyone teaching a credit or noncredit course offered by the university to the public.
2. Anyone currently employed by the university who performs additional services outside his/her regular job description (see Section 55 -part V of the Manual of Business Procedures).
3. Anyone currently enrolled as a university student.
4. Any Michigan State University graduates employed by the department in which they earned their most recent degree (within three months of completing their degree).
   

3. The status of any worker not falling into one of the above categories must be evaluated based on the IRS common law rules for distinguishing between employees and IC's. The Professional Services Contract Requisition form has been designed to assist in this evaluation.  Exceptions to item II.A.2, above, may be granted based on this evaluation.

B.  Independent Contractor

1. In general, an individual is an IC if the university has the legal right to control or direct only the results of the work and not the means and methods of accomplishing the result. Generally, these individuals provide services using their own names as self-employed, partnerships, or corporations, and make their services available to the public.
   
   
2. Examples of individuals who might meet the criteria for IC status include:

1. Guest performers or artists who otherwise are not affiliated with the university.
2. Guest speakers or guest lecturers brought to the university for a very short duration because of their expertise.
3. Individuals providing professional services, such as actuaries, attorneys and other consultants who routinely provide services within an area of expertise to the public for a fee.
   
   

III. Independent Contractor Professional Services Contract (PSC)

1. Purpose

1. The contract formalizes and documents IC relationships with the university. It is intended for use with all ICs who are U.S. Citizens or Resident Aliens, and where the work is greater than or equal to $600.

 

2. The contract must be completed for all IC's, except those who fall into the exempt categories (listed below). However, even in those instances where the IC is exempt, use of the Professional Services Contract is highly recommended.

 

3. Contracts are not required for:

1. Payments to research subjects or simulated patients, (simulated patients with long term assignments should be paid as employees).
2. Substitute Contracts: Payments charged against C&GA accounts (61-0000 through 61-9999 and 71-0100 through 71-4999) where a substitute contract form has been executed acceptable to the C&GA and retained in that office. This exception is available only at the discretion of C&GA.
   
   

4. For all legal service contracts and medical service contracts, departments are to contact the Purchasing Manager.

 

5. Departments are required to maintain records documenting the reasonableness of the cost of the service obtained, and the selection process utilized to choose the IC. In some cases, the dean or vice president may require that this documentation accompany the PSC for his/her signature.

2. Form

The Professional Services Contract Requisition

1. Page 1 - This is where all of the pertinent information is recorded regarding the IC and the department requiring the services. It includes all of the information identifying the IC and the departmental authorizations required which allow Purchasing to commit on behalf of the university.

2. Page 2 - This page contains the basic terms and conditions that the IC must agree to prior to engaging in the work. These terms and conditions are critical in protecting the interests of the university, the department, and the authorizing individuals. It is important that MSU insurance requirements are considered when hiring an independent contractor. See Risk Management and Insurance Section 35 in the Manual of Business Procedures for details. Any changes requested by the IC must be approved and accepted by Purchasing prior to final signature of the Professional Services Contract.

3. Page 3 -This is provided as a means for determining the reasonableness of a worker's classification as an IC (the default worker classification is as an employee). This page should be filled out by the initiating department.

If all boxes on page 3 are marked as “true” then the worker should be hired as an employee, and paid through the university payroll system, based on the IRS common law rules for determining worker classification either as an employee or as a contractor.

4. Page 4 - This page is the Invoice Approval Cover Sheet. It is to be completed and signed by the departmental authorized signer and is to accompany each invoice submitted for payment.

For assistance in completing the PSC Requisition, call Invoice Audit or Purchasing.

3. Restrictions

1. Payments to IC's cannot be made where a conflict of interest exists. For guidance, consult the Faculty Handbook or contact the Purchasing Department.

 

2. The PSC requisition should not be used for any work-related alterations, renovations or construction of facilities. Engineering and Architectural Services must be contacted for guidance in these matters.

3. General fund salary and labor accounts may not be used for payments to IC's.
   

4. Preparation, Processing and Routing

1. The PSC Requisition must be completed by the initiating department. The department should retain a copy of the completed PSC Requisition for its files.

 

2. Only one person or company can be paid on a single PSC.

 

3. All sections of the PSC Requisition must be completed.

 

4. All PSC Requisitions greater than $10,000 must be competitively bid or accompanied by a written sole source justification, prepared by the initiating department.

5. The PSC Requisition must be routed in the following order for acceptance and signature:

1. The requesting department is responsible for completing, and obtaining appropriate signatures, on all departmental sections of the form. When this is completed, the department should forward the form to the IC for completion and signature of acceptance (page 2). Purchasing cannot approve the contract without receiving pages 1-3 of the PSC requisition.
   
   

• All PSC requisitions must be signed by an authorized signer for the account being charged.
• Contracts greater than $5,000 must be signed by the dean, vice president, or designee within the dean’s/vice president’s office.
• If IC is a resident alien, department must obtain and attach a copy of a valid green card.
  
  

2. If charging accounts 61-0000 through 61-9999 route to C&GA for signature approval.
   
3. When all signatures and necessary approvals have been obtained, the PSC requisition is to be routed to Purchasing for creation of the purchase order and completion of the PSC process.

6. At the discretion of Purchasing, a PSC for a single payment under $5,000 may be processed without issuance of a PSC purchase order. The transaction will appear on the ledger as “000000” in the purchase order field. For all instances where a PSC purchase order is created, the contractor and department will receive a copy of the purchase order from the Purchasing Department. The PSC purchase order will instruct the contractor to forward all invoices to the originating department for review and approval.

7. The originating department can request changes or amendments to existing PSCs by contacting Purchasing in writing either via email or memorandum. The request must be issued by an authorized signer of the account being charged and is to include the following information:

1. A clear description of the change in the scope of work.
2. The change in total dollars.
3. The anticipated dates for performance of the additional work.
4. In instances where the additional work increases the total for the PSC over $5,000 the request for the amendment must be approved by a dean or vice president. (Note: if it is anticipated at the time of initiation of the PSC requisition, that additional work may be required of the IC, it is recommended that the dean/vice-president signatures be obtained with the PSC requisition).
5. In instances where the additional work increases the total for the PSC over $10,000, a written sole source justification must also accompany the request.
6. For all C&GA accounts (61-xxxx) Purchasing must receive written approval, in the form of an email or memorandum from C&GA granting approval of the change.
   
   

IV. Payment Processing

1. Invoice Routing
   

   
   Invoices are required for all contracts and are to include a full description and the dates of services rendered, and/or products provided. All invoices are to be forwarded by the contractor to the originating department for prior authorization and positive approval. The originating department is to complete the Invoice Approval Cover Sheet (page 4 of the PSC Requisition), assign the invoice dollars to the purchase order line item, obtain original signatures from an authorized signer of the account being charged and forward to Invoice Audit at 103 Angell Building. For any payments charged against C&GA (61-0000 through 61-9999), the Invoice Approval Sheet and invoice must first be forwarded to the C&GA at 301 Administration Building.

1. Additional invoice requirements:

1. When multiple payments are being made against a PSC, the originating department is to provide the completed Invoice Approval Cover Sheet for each invoice submitted for payment.
2. When services have been completed and the final invoice is submitted, the originating department is to check the box that reads “Last payment, close out encumbrance.”
   
   Additional requirements for invoices charged against C&GA accounts:
   
   
3. For any payments charged against C&GA accounts (61-0000 through 61-9999), the supporting invoice must be signed by the contractor. Likewise, the Invoice Approval Cover Sheet is to be signed by C&GA prior to submittal to Invoice Audit.
4. When multiple payments against a PSC are required for C&GA accounts, the Principal Investigator (PI) or hiring administrator’s signature is to be obtained under the Interim Payments section on each Invoice Approval Sheet.
5. The PI or hiring administrator is to sign under the section entitled “Final Payment” indicating that all services have been rendered satisfactorily. These must be routed to C&GA for approval, prior to submittal to Invoice Audit.

 

V. Forms

Professional Services Contract Requisition Form

Invoice Approval Cover Sheet

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