Contractual Services What is a contractual

slide1. Contractual Services What is a contractual service?

A contractual service is the rendering of services by an Independent Contractor, consisting of the Contractor’s time and effort.

Contractual Services may be performed by individuals or companies.<br>
slide2. Examples of Contractual Services Examples of Contractual Services performed by an independent contractor include:
Consultants
Legal services
Artistic services
Guest lecturers
Medical services<br>
slide3. Independent Contractors When paying an individual, the IRS requires FSU to make the correct worker classification prior to the services being performed.

The two classifications are “independent contractor” and “employee.”

If in doubt, payment as an employee reduces the risk of future tax problems for both the individual and FSU.<br>
slide4. Determining Worker Classification One factor that distinguishes an independent contractor from an employer-employee relationship is the degree of control FSU has and the right to exert over the individual performing the services. FSU need not exert the right before the person can be considered an employee; the right to control the individual’s work tends to indicate the person is an employee.<br>
slide5. Worker Classification IRS regulations provide that an employer-employee relationship exists when the University has the right to control and direct the individual performing the service, not only as to the results to be accomplished by the work, but also the details and means by which the result is accomplished, and whether or not the rights are exercised.<br>
slide6. Classification Determination The University must have a reasonable basis for treating the individual as an independent contractor.

This may consist of reasonable reliance on precedent, recognized industry practice, IRS rulings, or other reasonable basis.

The IRS has developed the Independent Contractor checklist to determine whether a reasonable basis exists.<br>
slide7. Classification Determination To be sure the individual you are contracting meets the legal requirements for classification as an independent contractor, we recommend that the checklist be completed by the requisitioning department prior to submitting a requisition to Procurement Services.

Only documentation prepared contemporaneous to the classification determination is persuasive to the IRS.<br>
slide8. Classification Determination It is always best to complete the Procurement Services form for Independent Contractor/Contractual Services Checklist for all Individuals who will be paid more than $500 per calendar year.

Completed forms should be kept in department’s files in the event they are audited by IRS regarding a worker classification issue.<br>
slide9. Classification Determination Independent Contractor Checklist:

http://procurement.fsu.edu/Forms<br>
slide10. Independent Contractors Only individuals who meet the legal requirements to be considered independent contractors can be paid by processing a requisition in OMNI.

EMPLOYEES, including OPS, part time, or visiting faculty, MAY NOT be paid via a purchase order.<br>
slide11. Employer Relationships Individual’s who are Independent Contractors will receive IRS Form 1099 for all payment in excess of $600 per calendar year.

Form 1099 may also be issued for other services not processed as consulting services by FSU.<br>
slide12. Worker Classification The IRS provides the following conditions as a means to determine worker classification for individuals performing services for FSU. Before submitting a requisition, apply these factors to the scope of work:

1. Reporting consistency
2. Substantive consistency
3. Reasonable Basis
4. Financial Control

*All four conditions must be met before submitting
a requisition.<br>
slide13. Reporting Consistency The use of certain category codes ensures that a FORM 1099 will be issued to the payee as an independent contractor at the end of the year.
Contact Procurement Services if you have questions regarding correct category code selection.

Procurement Services will review requisitions for contractual services and honoraria to determine that the category code is appropriate.<br>
slide14. Substantive Consistency The IRS requires the University to classify all individuals performing substantially the same services the same; that is, all are employees or all are independent contractors.
Example: At FSU, credit courses are taught by employees. Adjunct faculty members are employees. To meet the IRS test of “substantive consistency” an individual teaching a class may not be paid through Procurement Services as an independent contractor.
FSU or State of Florida fund designations such as Salary or Other Personnel Services (OPS) have no meaning to the IRS. Employees paid with OPS funds through payroll are employees for IRS purposes.
Full or part time status generally plays no role in the determination of “substantive consistency.”
It is the relationship of the parties, and not the number of hours or source of funds that determines the proper worker classification.<br>
slide15. Reasonable Basis Taken as a whole, how would the “reasonable person” apply the IRS guidelines to the scope of work to be performed by the Individual?

Does this person own and operate a business (including a “one-person business” or “sole proprietorship”) , selling his or her services to the general public?

During the dates the services are to be performed for FSU, will the individual continue to perform similar services for other customers, or would they have the right and ability to do so? Or does FSU expect the individual to work full time or virtually full time, or to be available when needed by FSU?<br>
slide16. Control Elements The IRS also supplies these tests to determine worker classification:

1. Level of financial control exercised by the parties;

2. Level of behavioral control exercised by the parties; and

3. Any written agreement between the parties, i.e., type of relationship.<br>
slide17. Financial Control Does the individual possess a significant investment in assets or tools required to operate his/her own business?

Does the individual advertise his/her services to the public?

Are there expenses related to the performance of the services that the individual is responsible for paying, i.e. that will not be paid or reimbursed by FSU?

Will FSU be responsible for paying the individual whether or not the work is done properly, or will he/she be paid only if the work is completed according to specifications?

Will the individual be paid upon completion of the services or upon completion of specific milestones or deliverables, or are structured payments required?<br>
slide18. Behavioral Control Behavioral Control addresses the issue of FSU’s right to direct and control how the individual performs the services for which they are hired.

In general, if FSU has the right to control what will be done, how it will be done, and when the work will take place, the person is an employee. This is true even if the employee will be allowed to exercise a great deal of freedom of action, including the freedom to determine what, when, and how the work will be performed.

What matters is that the employer has the right to control the details of how the services are performed. Many workers not under tight behavior controls still fit the definition of an employee.<br>
slide19. Behavioral Control - Overview Does FSU have the right to determine:
When and where the work will take place. (Most independent contractors perform the bulk of their work on their own premises.)

The order or sequence in which the work is to be performed. (Most independent contractors are primarily responsible for the final outcome, and need not follow FSU directed order or sequence).

Must the work be performed personally by the individual? Independent contractors may use assistants or subcontract portions of the work. Employees are hired for their personal experience and performance characteristics, not to achieve one specific outcome.<br>
slide20. Type of Relationship Relationship of the parties looks to whether or not there is a contract between the worker and the University and how it is worded. This includes provisions dealing with the permanency of the relationship such as continuing over a period of time (even if payments are made sporadically) or if the individual is hired only for a specific project or period.<br>
slide21. Additional Resources from the IRS Publication 15, Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 1779, Independent Contractor or Employee brochure

Publication 1976, Independent Contractor or Employee? Section 530 Employment Tax Relief Requirements

Employment Taxes for Small Businesses IRS Web page

IRS-2007-184, IRS and States to Share Employment Tax Examination Results

Payroll and Practitioner Resources
The IRS’s archived Tax Talk Today November 2007 webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?” focuses exclusively on worker classification issues.<br>
slide22. No Employees Allowed! EMPLOYEES MAY NOT BE PAID AS INDEPENDENT CONTRACTORS OR BE PAID HONORARIA OR STIPENDS ON A PURCHASE ORDER

IRS rules place strict limits on employees being paid as independent contractor.
IRS rules also place strict limits on past or future employees being paid as independent contractors.
There may be rare exceptions to this policy but please do not assume your situation will qualify.
In addition, State of Florida conflict of interest laws place severe restrictions on employees selling goods or services to FSU.
Contact Procurement Services for details.<br>
slide23. FSU Employee Payments You may be able to make payment to FSU employees for additional services unrelated to their primary employment through Human Resources and/or the Dean of the Faculties.

Prior to making any payment commitment contact the proper office for details.<br>
slide24. Taxable Income All payments for services to individuals represent taxable compensation to the recipient. If an employer-employee relationship exists, the compensation is considered wages and is subject to withholding tax and applicable FICA contributions. Wages are delivered through the payroll process and reported on IRS Form W-2.

Payments to Individuals determined to be independent contractors are reported to the IRS and to the worker on IRS Form 1099.

FSU does not provide tax information other than through the Office of Tax Administration.<br>
slide25. Requisitions For Contractual Services The following information is required on all requisitions for Contractual Services, including payments to Individuals:
Complete Scope of Work
Schedule of Deliverables
Fee schedule
Beginning and Ending Dates of Service (or range of dates)
Contract Manager’s name and telephone phone number. The Contract Manager is a position of great responsibility; it is the individual who is responsible for making certain the services are performed exactly as required by the contract before payments are authorized.<br>
slide26. Requisitions For Contractual Services Scope of Work:
The purchase order is the legally binding CONTRACT with
the vendor, therefore the scope of work must set forth the full details of work to be performed.

If you have a lengthy description and would like to submit a WORD document to use as an attachment to the purchase order, please contact Procurement Services to make arrangements prior to submitting the requisition.

Your requisition must reference the attachment in order for the attachment to become a legally binding part of the contract.

Indicate in the comments field how you are sending the attachment to Procurement Services.<br>
slide27. Requisitions For Contractual Services Deliverables: Contracts for services must include deliverables of some kind, such as reports, presentations, master video, and the like.

Payment Milestones: Payments should be tied to milestones, rather than to time periods. Milestones include the production of required deliverables, or completed and signed off on phases of a contract. Agreeing to make payments on a “calendar” basis puts the University and the department at risk of being legally required to make payments before the scope of work covered by the contract has been completed.<br>
slide28. Requisitions For Contractual Services Dates of service: Include the date (s) you are requesting the services to be provided. If it is for more than one day, please include “beginning and ending” dates. If you are unsure how long it might take or when the service can be provided, then use a block of time that you feel the work should be done (i.e. a week, 2 weeks, a month, 3 months). As long as the work is performed during that time period (not before and not after) you are fine.
FSU Contract Manager’s name and complete phone number. Example: (area code) _ _ _ - _ _ _ _.
Fiduciary Duty of the Contract Manager: The Contract Manager has a fiduciary duty to the University to oversee all elements of the contract including notifying Procurement Services promptly if problems occur to and withhold payments unless the Contractor performs all elements of the contract as specified. Lack of knowledge of problems does not relieve the Contract Manager of this fiduciary duty.<br>
slide29. Blanket Orders For Contractual Services You can have blanket orders for some types of contractual services (i.e. design services, medical services, legal services, security guard services, etc.) However, all contractual service blanket orders must include a fee schedule for all services that are to be covered.

This may be an hourly rate, rate per task, per day, etc. The vendor should be able to furnish you with a fee schedule. This will provide the Accounts Payable adequate information to audit the invoices accurately.<br>
slide30. Contracting With Or Paying Honoraria To Foreign Individuals Payments to individuals who are not U.S. citizens or U.S. residents with proper documented work status, for work performed in the United States, puts BOTH the University and the individual at risk.

Don’t guess! If you are unsure about the work status of an individual, contact Payroll Services at 850-645-7261 for further information.

Individuals with non-U.S. permanent home addresses who are eligible to be paid for work performed in the United States MUST be paid through the Payroll department. Do not enter a requisition in OMNI.

Foreign individuals who are not eligible to be paid through FSU payroll are not eligible to be paid through the Foundation or the Research Foundation. It is the workers Visa status, not the source of funds, that determines the legality of the payment.<br>
slide31. Do You Want To Own And Use What You’re Buying? Intellectual Property and Copyright Law:
Paying a photographer to take photographs, a writer to write, or an artist to produce art are only a few examples of times of when you would pay someone to produce a product or service that meets the legal definition of “intellectual property”. Paying the individual or company to produce a product or service does not mean you own it, nor that you have the right to use the product or service any way you choose. To secure these rights, you must have a Work for Hire form and a purchase order in place prior to any work performed. That’s the law!

Betty Southard, in the Office of Sponsored Research, is the FSU Attorney who will assist you with intellectual property concerns. Procurement Services can also assist you as well. The law in this area is very fluid, and is rewritten regularly. The only way to be sure you do not pay an individual or company to produce a product for you, that you cannot legally use, is to secure your right to use the product in advance.<br>
slide32. Examples Examples of original works that may be protected by copyright and trademarks include, but are not limited to:
Software that is written
Software multimedia
Web site development
Other electronic media
Music used in productions
Images used on Web sites and other items
Photographs
Video film footage
Literary works<br>
slide33. Work For Hire When a department needs to obtain a product or service that engages an individual or business in creating original works, the department, working with the vendor, is required to submit a “Work for Hire” form. A department must ensure that the form is signed by someone with delegated Power of Attorney. A Work for Hire is a form that was created by FSU to protect against foreign and domestic copyright law, ownership, and other legal issues with regards to the use of the original work(s).  In other words, the individual or business was contracted with to create the work. Works for hire are not owned by the author, and shall be the sole and exclusive property of FSU, and it’s successors.

The Work for Hire form can be obtained by navigating to the Procurement Services website at http://procurement.fsu.edu/Forms .<br>
slide34. Competitive Solicitation Requirements Contractual services are not exempt from competitive solicitation requirements but may fall under criteria that not normally applied to commodities.

Competitive solicitations for contractual services require detailed specifications and close coordination between Procurement Services and the order department.

Call the Procurement Services Contractual Services Specialist well in advance of the required start date for ALL services.

Never allow a contractor to begin work until Procurement Services has issued a purchase order.<br>
slide35. Over $1 Million…Special Handling Required The University President must sign all purchase orders for $1,000,000 or more.

Average Processing Time: depends upon the President’s schedule. Contact the Procurement Services Specialist for details. Allow extra time to obtain required signatures.<br>
slide36. Completion Of Contractual Services When a milestone payment is due, or the work is completed, the Contract Manager makes a note in his/her contract file that he/she is approving the invoice, and promptly notify designated individual in his/her department to enter a receipt in OMNI.

The receipt notifies Procurement and Payables that a phase of the contract or the entire contract has been completed.

Departments must not receive all or any portion of a contract in OMNI unless and until the Contract Manager certifies that the work has been completed to the department’s satisfaction and in full compliance with the agreed upon terms in the Contract.<br>
slide37. Contractor Payments All contractors should be advised that the State’s payment terms are “Net 40 days from receipt of invoice and certification of completion.”

Individuals being paid an honorarium, which is by definition a token of appreciation and not a fee for services rendered, virtually never submit invoices. It is the responsibility of the department paying the honorarium to prepare and timely submit an invoice to Accounts Payable. Honoraria cannot be paid without an invoice.

Cash flow problems experienced by a vendor or a departmental preference are not justifiable reasons to abrogate the State’s payment laws. Procurement Services may require the vendor to submit a written statement attesting to the fact that payment terms have never been extended to another agency or firm, and that the services will not be rendered unless they are guaranteed payment upon completion.<br>
slide38. Change Orders The issuance of a purchase order initiates a binding contract between the University and the vendor.

After a purchase order is issued, it cannot be unilaterally changed by either party and it cannot be changed at all without just cause.

Additional compensation for contractual services is not allowed under the laws of Florida. Contact the Procurement Services Specialist for details.

It is the ordering department’s responsibility to secure the vendor’s approval of a change or cancellation of a purchase order.

If you need to extend the dates of service or any type of change, please include an explanation on the Change Request Form. These changes SHALL be done before the period of service has expired.<br>
slide39. Change Orders Change orders are
required to:

Decrease purchase order quantities when absolutely necessary

Cancel items on a purchase order

Cancel the purchase order<br>
slide40. Additional Compensation Prohibited: Pursuant to Section 215.425, F.S., additional compensation may not be granted after a contract has been executed or a purchase order issued, unless additional services will be provided AND unless the original purchase order or purchase order/contract combination were structured to (1) allow for additional compensation and (2) set forth specific details as to how the payment amounts will be calculated. Contract amendments increasing the total purchase order/contract amount are permissible under the following circumstances only:<br>
slide41. Additional Compensation Continued… Additional services are being provided and,

The original purchase order or contract specifically provides for the possibility of payment of additional funds, and

The original purchase order or contract provides specific details regarding the extent of services covered by the original contract (the baseline services that are covered by the initial cost), and

The original contract contains the exact pricing algorithm that will be used to determine the amount of extra compensation due, if extra services are provided.<br>
slide42. Additional Compensation May Be Permitted… IF the total amount of a contract was not established as a fixed fee contract but was originally written to include unit pricing (e.g. per hour, day, week, student evaluated, etc.,), and
If the rate of pay remains the same, and
If the scope of work remains the same except for additional instances of identical services performed in the original contract, and
If the additional work is not comprised of additional units of the same work that could have been, should have been, or was known to the department and/or the Contractor at the time the original contract was established, and
If the additional services are clearly supplemental to the original contract and not an attempt to expand the scope of work beyond it’s original intent.
If the purchase order or contract is based on a Competitive Solicitation (Invitation to Bid, or Invitation to Negotiate), extra compensation may not be paid unless the competitive solicitation specifically included the option for additional services to be provided, and set forth the formula to be used to calculate extra compensation, and the specific unit cost (in dollars) for each increment of extra compensation.<br>
slide43. Definitions<br>
slide44. Artistic Services Services provided by an individual, group of individuals or a business who profess and practice a skill in the area of music, dance, drama, folk art, creative writing, painting, sculpture, photography, graphic arts, craft arts, industrial design, costume design, motion pictures, television, radio or tape and sound recording or in any other related field.<br>
slide45. Consultant Or Research Consultant A recognized expert in a particular field who provides information, advice or technical assistance to faculty or staff.

When a requisition is submitted to initiate a purchase order or a contract for a consultant, if requested to do so by the Procurement Specialist, the Requisitioner should indicate on the requisition that based on the education, experience and training of the consultant, the fee is reasonable under the circumstance.<br>
slide46. Contract Administrator The University employee responsible for maintaining a contract file and financial information on all contractual services is the Contact Administrator for the University.<br>
slide47. Contract Manager The Contract Manager must be a permanent University employee responsible for overseeing the performance of the Contractor with regard to the scope of work, schedule of deliverables, milestones, terms, conditions and specifications of the purchase order or purchase order/and contract.
The Contract Manager has a fiduciary duty to the University to insure that all services are performed as specified in the contract, including insuring that no changes are made to the scope of work, deliverables, milestones, payment amount or payment schedule, or dates of service without the prior written approval of Procurement.
The Contract Manager accepts the responsibility of serving as a liaison with the Contractor, his/her department, and Procurement Services, and is responsible for certifying to Accounts Payable that the services were satisfactorily completed in full accordance with the written contract, before payments are authorized.
The Contract Manager must maintain a contract file for each contract he/she manages, with detail commiserate with the scope of the contract itself.<br>
slide48. Contractor / Vendor A person, business or firm who sells or provides commodities or services to the University<br>
slide49. Contractual Service The rendering by a contractor of its time and effort rather than the furnishing of specific commodities.

The term applies only to those services rendered by individuals and firms who are independent contractors (i.e. they have no connection with the University).

OPS employment is not considered to be a contractual service.

Contractual service doesn't include labor or materials for the construction, renovation, repair or demolition of facilities entered into pursuant to s. 255, Florida Statutes.<br>
slide50. Honorarium: A Token Of Appreciation Definition: A payment to Individual given as a token of appreciation for which a fixed fee is not established, but is commiserate with the reputation of the individual and the type of honorarium event.

If the payee has fixed the amount of the payment, it is not an honorarium, regardless of the amount of the payment.

Honoraria are taxable income to recipients, therefore the same rules that apply to payments for all independent contractors, including the prohibition of making honorarium employees, applies.

Travel Expenses are paid under IRS accountable plan rules, must be in compliance with Ch. 112.061, Fla. Statute, and are not considered taxable compensation to recipients.

See FSU Controller’s web site for processing instructions.<br>
slide51. Lecturer An individual who speaks or conducts seminars on a specified subject in which he/she is a recognized authority, over a period of not more than seven days.

If the series of lectures or seminars covers a longer period, the individual is considered an instructor whose services may require a competitive solicitation, if total payment (regardless of time frame) may exceed $75,000.

An individual who provides consulting services is considered a consultant whose services require a competitive solicitation if the cost of these services are $6,000 or more, whether or not a lecture is part of the total scope of work.<br>
slide52. Payment Upon Completion A purchase involving a contractual service where the contractor requires payment immediately upon completion of the service or performance as opposed to the normal invoicing process.<br>
slide53. Sole Source Purchase The purchase of a commodity or service that is non-competitive in specifications or use and is available from a single vendor.

Consulting services are never a sole source.

If a commodity or service is available from more than one individual or vendor, it is not a sole source.<br>