Employees vs. Independent Contractors - Tax Treatment

Employees vs. Independent Contractors - Tax Treatment

February 26, 2014

A worker’s relationship with the University or hiring organization determines how compensation is taxed.

Employees

An employee is an individual who performs a service for the University and is working under the direction and control of the University or its employees. Direction and control can be implied to exist when the employer has the right to control the results as well as the means and methods of the worker. 

Generally, the employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.

Independent Contractors

An independent contractor is an individual engaged by the University to perform a specific function or task, and who is free to perform this function or task at the individual's own discretion with regard to means and methods. 

The University does not have to withhold or pay any taxes on payments to independent contractors (IRS Treasury Regulation 31.3401(c)-1(b)).   

Departments must use the Independent Contractor Pre-Hire Worksheet when evaluating a candidate as an independent contractor.