MBP 76

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

Policy Owner: University Services Purchasing 

Last Reviewed: 09/2017
Last Updated: 09/2017

Angell Building
166 Service Road, Room 102 
East Lansing MI 48824  
Phone: (517) 355-0357 | Fax: (517) 353-2024   
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MBP 76

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

76.1   Purpose
76.2   Determining Employment Status and/or Classification
      76.2.1   IRS Guidelines
      76.2.2   Employee
      76.2.3   Independent Contractor
      76.2.4   Present and Former University Employees
76.3   Independent Contractor Personal Services Contract (PSC)
       76.3.1   Purpose
       76.3.2   Restrictions
       76.3.3   Preparation, Processing, and Routing
       76.3.4   Invoice Routing
       76.3.5   Honoraria, Speaker Fee, and Performer Payment Process
76.4   FAQ
76.5   Examples
76.6   Definitions
76.7   Forms

76.1   PURPOSE

This policy provides the criteria that define independent contractors (IC) and the required procedures to correctly classify and pay U.S. citizens and resident aliens for services that cannot be provided adequately by regular or temporary employees within the university.

The status of a worker lies along a continuum between independent contractor and employee, and it is important to classify them correctly.

Both the university and the individual could be subject to liability including penalties and substantial tax issues for misclassifying workers as independent contractors, and failing to file required tax forms. Under no circumstances should a services contract be used to circumvent university employment procedures or to perform a service that could be accomplished by available personnel within the university.

76.2   DETERMINING EMPLOYMENT STATUS AND/OR CLASSIFICATION

Michigan State University (MSU) must comply with the law, including Internal Revenue Service (IRS) regulations and the Fair Labor Standards Act, in its role as an employer. Failure to do so can result in assessment of taxes, penalties, and interest. One university responsibility in this regard is the accurate categorization of workers as either employees or independent contractors, with the corresponding tax withholding and reporting functions inherent in each category of worker.

Categorizing a worker as an independent contractor exposes the university to the greatest amount of risk in this regard, since the law in this area generally presumes that all individuals who provide a service are employees unless there is documented evidence to support classifying the individual as an independent contractor. For example, the IRS examines the facts and circumstances of each situation and analyzes characteristics, such as behavioral control, financial control, and the relationship between the contracting entity and the individual performing services. The U.S. Department of Labor (DOL) examines whether the individual performing services is economically dependent on the contracting entity, based on a multi-factor test.

Before the services have been secured and commenced, a department(s) contracting for services must assess the relationship with the individual providing such services to ensure that they are properly classified. The initial responsibility for determining the classification of an individual lies with the department. To determine the accurate status, refer to the Employee vs. Independent Contractor Determination Guide. If the use of the guide demonstrates that the individual should be an employee, contact Human Resources at (517) 353-4434.

      76.2.1   IRS and FLSA Guidelines
 A. United States federal and state law requires the university to properly classify its workers as either employees or independent contractors. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control and the Relationship of the Parties. See IRS - Payment to Independent Contractors
  1. Behavioral Control - whether the university has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
    a. Is the worker receiving instruction and training regarding how the work is to be done rather than rely on the worker’s expertise?
    b. Does the university set the number of hours and/or days of the week the worker is required to work?   
  2. Financial Control - whether the university has a right to direct or control the financial and business aspect of the work.
    a. Are the business aspects of the worker’s job controlled by the business owner? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, facilities).
    b. Does the worker make his or her services available to the general public?
    c. Can the worker realize a profit or incur a loss?
    d. Is the worker’s investment in the work is greater than the business owner’s?
  3. Relationship of the Parties - how the business and the worker perceive their relationship.
    a. Will the worker receive benefits which are traditionally deemed employment benefits, such as pension plan, insurance, or vacation pay?
    b. Will the relationship continue and is the work performed a key aspect of the business?
    c. Has the worker been employed by the university previously?
      76.2.2   Employee:
A. 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 independent contractor 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. Similarly, where the university has the financial control in the relationship, the presumption is that the individual is an employee—not an independent contractor.
B. University policy requires that the following workers be compensated as employees on university payroll:
  1. Primary instructor, teaching a credit 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, in most cases. Contact Purchasing for guidance at (517) 355-0357.
  3. Anyone previously employed by the university and performing the same/related services to the services they provided as an employee.
  4. Anyone currently enrolled as a university student.
 C. The status of any worker not falling into one of the above categories must be evaluated based on the rules for distinguishing between employees and Independent Contractors. The Personal Services Contract has been designed to assist in this evaluation.

      76.2.3   Independent Contractor:

A. An individual is an independent contractor if the university has the legal right to control or direct only the end product of the work and not the means and methods of accomplishing the result. Generally, independent contractors identify themselves as self-employed and make their services available to the public.
B. Examples of individuals who might meet the criteria for IC status include:
  1. Individuals providing unique professional services, such as short-term consulting engagements, and others who routinely provide services within an area of expertise to the public for a fee. 
  2. Educational advisory services, researchers.
  3. Freelance writing, photography, editing and interpreting.
  4. Guest speakers, lecturers or performers (see Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments for processing instructions).

C. When the status of a worker cannot be determined from the above guidelines, contact Purchasing at (517) 355-0357 for guidance prior to the services being performed.

      76.2.4   Present and Former University Employees:

A. The initial responsibility for determining the classification lies with the department obtaining the contractual services. The department should first verify that the individual is not or has not been employed by the university.
B. Present and former university employees performing the same work for the university will rarely meet legal criteria for independent contractors and should usually be paid as employees. According to IRS and DOL guidelines, a continuing relationship is one indication of an employee-employer relationship. In addition, any employment of present and former university employees as independent contractors should be evaluated carefully for other indications of employee status.
C. The law narrowly prescribes the circumstances in which retired/former employees qualify to perform services as an independent contractor. Retired/former employees performing essentially the same/similar services as when they were employed constitute what would be viewed as a continuing relationship. These individuals should be classified as employees and paid by Payroll. 

76.3   INDEPENDENT CONTRACTOR PERSONAL SERVICES CONTRACT (PSC)

      76.3.1  Purpose:     

A. The Personal Services Contract formalizes and documents a relationship between an independent contractor and the university. It is intended for use with U.S. citizens or resident aliens (copy of Green card is required) and where the contract value is greater than or equal to $2,500.
B. It is to be used for unique, professional, or technical services that are predominantly intellectual in nature, require specialized knowledge, and are part of a specific project—not ongoing.
C. The Personal Services Contract must be completed for all independent contractors, except those who fall into the exempt categories (listed below). Contracts are not required for:

  1. Guest speakers or lecturers brought to the university for a very short duration because of their expertise. See Manual of Business Procedures Section 71.
  2. Guest performers or artists who otherwise are not affiliated with the university. See Manual of Business Procedures Section 71.
  3. Payments to research subjects or simulated patients, (simulated patients with long term assignments should be paid as employees).
  4. Substitute Contracts: Payments charged against CGA accounts where a substitute contract form has been executed acceptable to CGA and retained in that office. This exception is available only at the discretion of CGA.

D. Departments are required to attach all documentation regarding the reasonableness of the cost of the service obtained and the selection process utilized to choose the IC to the KFS requisition e-doc.
E. A graphic has been developed to aid in determining the appropriate method of payment based on dollar amount and the services to be rendered. Contractual Services Decision Tree

      76.3.2   Restrictions:

A. The PSC is not to be used for any campus-related alterations, repair services, lab testing services, renovations or construction of facilities or services involving labor in general.
B. The PSC is not to be used for the procurement of printed materials, other products or supplies, but is intended for use with contracted services only
C. The PSC is not to be used for “routine” services such as scientific testing, marketing, graphic design, etc.; departments can complete a requisition and attach the quote/proposal and any additional information. A PSC does not need to be completed.
D. The PSC is not to be used for web design or IT consulting services. These services may require additional data/security reviews.
E. The PSC is not to be used when contracting with a company. The PSC is only to be used for individuals.
F. The PSC is not to be used for subscription services or license fees.
G. The PSC is not to be used for high dollar transactions. They should be processed on a requisition and purchase order, preferably on a competitive bid basis utilizing Purchasing’s Request for Proposal process.

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      76.3.3   Preparation, Processing, and Routing:

A. The PSC must be completed by the initiating department. The department should retain a copy of the completed PSC for its files. The completed PSC is to be attached to the requisition in the Notes and Attachments tab along with any additional documentation (scope of work, proposal, sole source letter, etc.). The requesting department is also responsible for obtaining a social security number from the individual if they are not a current vendor. The department is also responsible for the safe storage of social security numbers, as they are sensitive information.
B. The PSC is not intended for use as an “after-the-fact” means of paying suppliers. All documentation is to be completed in advance of bringing an independent contractor on board to perform specific services. Services that are started prior to having a PO in place are considered “unauthorized,” and require a letter of acknowledgement stating the reason for the late submittal. See Manual of Business Procedures Section 270.4.4.
C. All sections of the PSC must be completed.

  1. Page 1 - includes the pertinent information regarding the independent contractor, the department and requested services.
  2. Page 2 - 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 in the Manual of Business Procedures Section 35 for details. Any changes to the terms and conditions requested by the IC must be approved and accepted by Purchasing prior to final signature of the PSC.
  3. Page 3 - provides assistance with 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 (with input from the IC if necessary) and signed by the initiating department. If a number of boxes on page 3 are marked as “true”, or you are unsure about whether the factors indicate an IC relationship, contact Purchasing to obtain assistance in determining the contractor’s status. If most of the boxes are marked as “true,” 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. Note that a summary of the overall test for: (1) the IRS is whether the employer controls the manner and results of work and (2) the DOL is whether the employer controls the financial relationship with the worker. Consideration of both tests is necessary.
D. All PSCs greater than $15,000 must be competitively bid or accompanied by a written single/sole source justification, prepared by the initiating department and attached to the requisition.

      76.3.4   Invoice Routing:

A. Invoices are required for all purchase orders/PSCs and are to include a full description and dates of the services rendered, the PO number referenced, and a remit to address. All invoices are to be sent to Michigan State University, Accounts Payable, 166 Service Rd, Room 103, East Lansing, MI 48824. Accounts Payable accepts invoices from both MSU departments and suppliers electronically (see Accounts Payable email instructions). Instructing contractors to submit invoices directly to the department will result in a delay in payment.

      76.3.5   Honoraria, Speaker Fee, and Performer Payment Process:

A. Payment for these specific services is made by completing a Disbursement Voucher (DV), along with the completed Honoraria/Speaker/Performer Checklist. See the Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments for the full process.
B. A PSC and requisition are not needed when paying honoraria, speaker or performer fees. If the service provider has an agreement/contract that requires signature, route it through Purchasing for signature to authorize the contract before services are performed. 

76.4  FREQUENTLY ASKED QUESTIONS

A. What is a definition of personal services?
Personal services are unique, technical and/or infrequent functions performed by an independent contractor qualified by education, experience, and/or technical ability to provide services. In most cases, these services are of a specific project nature, and are not a continuing, ongoing responsibility of the institution. The services rendered are specialized in nature even though the contractor may not be required to be licensed.

B. What types of services are processed on a PSC?
Personal services over $2,500, such as short term consulting engagements, educational advisory services, freelance writing, interpreters, and others who routinely provide services within an area of expertise to the public for a fee.

C. What services should not be processed on a PSC?
Services that are considered “routine”, will continue indefinitely, or involve labor, such as: catering, marketing, temporary employment, lab testing services, web design services, IT consulting services, and architectural or construction services.

D. If the supplier has their own agreement, should a PSC also be processed?
No, a PSC is not necessarily needed if a supplier has their own agreement, as it could result in contradicting terms and conditions. The supplier’s agreement (instead of a PSC) should be attached to a requisition for PO processing if services (excluding speakers/performers) exceed $2,500. Unless the initiating department has delegated signature authority, departments do not sign supplier supplied agreements. They should be sent to Purchasing for signature review. Be aware that external agreements may need additional reviews. It is the university’s preference to use our own agreement whenever possible, as it expedites the approval process.

E. What is a single or sole source justification?
Requests for exception to the competitive process, such as single source (only one qualified supplier or acceptable product/service) or sole source (only known source or a proprietary source) purchases must be requested in writing from the initiating department. All requests for single source and sole source purchases must include detailed, objective and technical justification outlining the rationale for exception to the competitive bid process.

F. How do I pay a speaker, presenter or performer?
These payments can be processed via DV along with a completed Honoraria/Speaker/Performer Checklist. See the Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments for the full process.

G. What is the difference between a Personal Services Contract and a subcontract?
A Personal Services Contract is a written agreement for a specialized service not available through a routine service provider. The contractor requires a specialized knowledge in a particular field and often requires originality, creativity, and decision-making abilities. A subcontract is an agreement written under the authority of and consistent with the terms of the Prime Award (grant or contract) that transfers a portion of the research or substantive effort to another organization. The collaboration is substantial enough that the collaborating individual or organization will participate in preparation of results, publication, presentation or other collaborative participation beyond routine analytical work.

76.5   EXAMPLES

A. A department would like to contract with a previous employee:
A researcher that was once an MSU employee returns to the university to continue research on a grant funded project that they were involved with as an employee.

This individual must be paid on payroll; this would be viewed as a continuing relationship.

B. A department would like to contract with a previous employee:
An individual that was once an MSU employee in an administrative role returns to the university to provide statistical and analytical services on a project. They will not be supervised or have set work hours.

This individual may be paid as an independent contractor. The nature of their work is significantly different than their role and responsibilities as an MSU employee, and they are not being supervised or directed as to how the work should be done.

C. A department would like to contract with a current MSU employee:
A faculty member that teaches a for-credit “Concepts of Graphic Design” also does some freelance graphic design work for the department.

This individual may be paid on payroll for their freelance work. The nature of the work is too closely related to their duties as an employee.

D. A department would like to contract with an independent contractor for services that are greater than $2,500:
A department would like to contract with an individual to write articles for a publication. The writer will be working from home and setting their own work hours.

This individual may be paid as an independent contractor on a PSC. They are working independently, and not being supervised or directed how the work should be done.

76.6   DEFINITIONS

A. Conflict of Interest (COI): The university defines a conflict of interest utilizing the same definition as the State of Michigan which is available on the Michigan Legislature website. A Board of Trustees approval process exists which, when completed and approval is obtained, enables employee owned companies to do business with the university. A conflict of interest can also exist if a supplier is related to an MSU employee and the situation results in potential and/or perceived financial gain for the employee or a situation in which an employee has the ability to influence the supplier relationship.

B. Contract & Grant Administration (CGA): 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.

C. Contractor/Supplier Agreements: In the event that the contractor or supplier provides their own agreement, end users are not to sign these agreements. External agreements and contracts of this nature are to be forwarded to Purchasing for review, consultation and signature. Following initial review, Purchasing will advise the department on the best course of action for the procurement. Purchasing will assist with obtaining review by legal counsel, risk management and other service providers, as appropriate.

D. Employee: Every individual performing services for and compensated by the university is presumed to be an employee unless she/he meets the criteria of independent contractor status. All employees are compensated through MSU’s payroll process.

E. Employee-Employer Relationship: An employee-employer relationship exists when an employer has the right to direct and control the work of an individual who performs the services, including not only the results to be accomplished but also the methods and means by which the results are accomplished. An employee-employer relationship exists even if the employer does not exercise the right to direct or control the manner in which the worker performs the services.

F. Independent Contractor (IC): An individual who performs services, but, by meeting certain criteria, is not classified as an employee. The criteria are set forth in this manual. For this manual, the term “independent contractor" refers to individuals who are US citizens or resident aliens. An independent contractor contracts with the university to provide services for which the university controls or directs the result, not the means and methods of accomplishing the result. As a general rule of thumb, independent contractors should have the opportunity to experience a profit or loss, deliver the same type of service to multiple organizations, and be responsible for payment of their own business expenses (including general liability insurance).

G. Non-Resident Alien: This is a foreign individual who is not a U.S. citizen or resident alien. When engaging a non-resident alien to provide services, 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.

H. Purchase Order (PO): A completed purchase order accompanies the Personal Services Contract (PSC) as part of the final contract. The independent contractor is required to reference the purchase order on all invoices, or payment may be delayed. The independent contractor may not begin work until a purchase order has been issued.

I. Personal Services Contract (PSC): This is a form that assists in defining the relationship between a potential contractor and the university and whether the individual should be an employee or an independent contractor. The PSC form documents the approvals necessary to engage an independent contractor at MSU and defines the scope of work, timetable, hourly rate, payment terms and conditions for a particular project. The completed, signed form is to be submitted as an attachment to the requisition e-doc. A Buyer will then begin to process the purchase order. The Personal Services Contract is required for independent contractor services greater than or equal to $2,500, excluding honorarium, speaker and performer payments.
See Manual of Business Procedures Section 71, Honoraria, Speaker Fee, and Performer Payments

J. Resident Alien: This is a foreign individual who is a permanent resident of the U.S. but does not have U.S. citizenship and holds a valid Green Card.

76.7   FORMS
A. Personal Services Contract Form
B. Honoria/Speaker/Performer Checklist
C. Employee vs. Independent Contractor Determination Guide 
D. Contractual Services Decision Tree
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