Procedures For Handling Non-Wage Compensation To U.S. Citizens And Permanent Residents
Multiple laws and regulations define and govern the payment of wages to employees and non-wages to independent contractors who provide varying types of personal services throughout the university community. The purpose of this procedure is to provide guidelines which, if generally followed, will permit prompt handling of non-wage transactions through the university’s accounts payable system.
Non-wage payments are administered by the Purchasing and Controller’s Offices through the accounts payable system and are subject to federal, state, and local income taxes.
To prevent potential employment tax liability, the university is required by the Kentucky Department of Finance to review the status of all persons proposed to be employed under each contractual arrangement to determine whether those persons must be classified as employees or independent contractors. Once the university determines that an employee-employer relationship exists for an individual wage earner, the employing department will be directed to formally place that individual “on the payroll” to facilitate the systematic collection of all applicable employment taxes.
The circumstances of each situation determine whether a particular transaction will be handled through the accounts payable system as a non-wage payment or through the payroll system as a wage payment. Unit business managers are encouraged to acquaint themselves with the information contained in the Internal Revenue Service publications indicated in this procedure as applicable references.
Payments for non-recurring personal services may be processed through the university’s accounts payable system under the following conditions:
• Compensation is made to a U.S. citizen or a lawful permanent resident, i.e., anyone other than a foreign national.
• Person receiving the payment is not being compensated as a university employee during the current calendar year.
• Documentation (Request for Disbursement Form) will indicate the individual is being compensated as a “distinguished guest speaker”. Laws prohibit the university from making payments to non-employee workers if a substantially similar payment has been made to an employee since January 1, 1978. The university remains liable for social security and medicare taxes even though these taxes were not deducted and withheld because an employee was treated as a non-employee. The terms “visiting”, “professor”, “instructor”, “scholar”, “teacher”, or any other partial title presently used throughout the payroll system will not be used.
• Documentation will also include a signed and dated Form W-9, Request for Taxpayer Identification Number and Certification.
• The actual payment will be described as a “fee” in all documentation. The term “honorarium” will not be used (because it has been previously used in the payroll system).
• Compensation must be established as a single payment. • Services are non-recurring and the period over which services are provided should be six (6) weeks or less. Services provided over a longer period of time are assumed to be recurring and must be compensated through the payroll system.
• The guest speaker is to be provided a letter of invitation which contains language similar to “You will receive a fee of ___ dollars. According to IRS regulations, the university must report these fees on a Form 1099-MISC at the end of the calendar year. There will be no taxes withheld in this payment. Please consult a tax advisor to determine the proper tax treatment.”
- Publication 15 (Circular E, Employer’s Tax Guide)
- Publication 15-A (Employer’s Supplemental Tax Guide)