Consultants & Independent Contractors

ICs & the UT Research Community

The university's position toward Independent Contractors, Consultants and other 3rd party solutions is that first and foremost, we employ university personnel --work done for UT by UT is the university's priority. Here's the wording lifted directly from the Office of Accounting and Financial Management:

• It is expected that The University of Texas at Austin activities will be carried out to the maximum extent possible by using the services of regular and temporary employees.
   
  • However, independent contractors may be used when the necessary services cannot be provided adequately by regular or temporary employees within the scope of their employment or in emergency temporary circumstances.

The university's position makes clear why a justification is needed in the first place to work with 3rd party solutions - we have to demonstrate that the work or service needed can't be satisfied with 'in house' options.

• Of course, with research, the need for a 3rd party solution is often obvious, but we still have to demonstrate it to move forward. (Note: below contains typical, not exhaustive, information specific to research)
   
  • UT is consistenly ranked as an R1-Doctoral University with Very High Research Activity, so it's often the case that a highly specialized product or service becomes neccessary to a project, and requires outsourcing to an individiual (or entity) with one or both of the following factors:
     
    • Exceptional, unique and/or rare qualifications that are required to deliver a product or service needed to accomplish the goals of a research project
       
    • Required qualifications combined with being located in a geographical area essential to the success of the research project
       
  • Often, PIs already have a working relationship with the Independent Contractors they plan to work with, or have already identified individual(s) who will be contributing to the research goals of a project.
     
    • In cases when they haven't identified someone, there are additional vendor options to take into account, as well as competitive bidding requirements that may factor into the process.
       

NOTE: When it comes to contracting with 3rd party solutions, the terms Independent Contractor and Consultant are interchangeable, as a paid individual Consultant would be classified as an Independent Contractor for purpose of payment.

 To jump into more detail about Independent Contractors, head to the additional sections below.

CONTRACTORS Must Have CONTRACTS

Methods for paying Independent Contractors (ICs) is a topic that comes up frequently with our Principal Investigators. (PIs) This is sometimes a sticking point for PIs who are faced with needing to pay Independent Contracts or Consultants, but to be very clear, the only way to pay a non-UT person for UT-benefitting paid services is to have some kind of agreement in place, whether it's a purchase order or contract. 

UT Policy Governing IC & Consultant Payments

1. Handbook of Business Procedures, HBP 12.1
2. The university's Business Contracts Office and Purchasing Office
3. Office of Accounting and Financial Management Tax Office

There are many scenarios that involve ICs and Consultants who contribute to research at UT. The type of work determines whether or not someone is categorized as an IC, and an individual's immigration/visa status and place of residency, as well as location and duration of the work also play significant roles.

An individual is likely to be an IC if the following are the case:

• Not a UT student or employee of any kind (including per federal IRS guidelines)
• There is a requirement to carry out duties that benefit research at UT
  • Individual is not responsible for the direction of the research on a sponsored project
    (Otherwise, this would more likely be a subcontract with another organization)

 

• The source of funding also plays a role --in order for sponsored research funds to cover costs of ICs and Consultants, that type of cost must be a documented part of the project, meaning it's included in the project's Statement of Work (SOW) and Budget.
   
  • In some cases, seeking written permission after-the-fact from a sponsor creates sufficient approval to move forward --this depends on each sponsor.
     

Many of our Researchers want a fast and easy way to pay ICs and consultants. Because of the very nature of a contractor's status, the appropriate funding mechanism and tax consideration must be put into place in order to pay them.

Learn more in the sections below, including the section on how to improve the payment process if timing is of concern.

Friends don't let friends deep dive into tax treaties!

 ---But we do provide a framework to help make sense of why paying Independent Contractors (ICs) and Consultants can be so complicated and involve such a time consuming process.

When UT-benefiting services are to be performed and compensation to be paid, there are also tax considerations to take into account.

• In a bygone era, contractors getting paid in cash or from an individual reimbursed afterwards, may have worked out and even been allowable in some circumstances, but it's not something that works today.
   
  • The online systems that register and track funding activity create a layer of accountability that puts compliance at the front of the line when paying ICs.
     

• IT ALL COMES DOWN TO THIS:

  • The university can face SERIOUS FEDERAL PENALTIES for miscategorizing the status (and tax category) of an employee/Independent Contractor. This is why UT has a thorough process in place for vetting details about the individual, the work, the pay, etc.
     
  • Non-U.S. contractors are not automatically exempt from paying U.S. tax on income earned in the U.S. and/or from U.S.-based funds for U.S.-based purposes. 
    
    Here's the exact wording per UT guidelines:
    Compliance with immigration law and tax law is required for all individuals who perform work inside the United States. Any preparation done outside of the U.S. that is related to an activity or service performed inside the U.S. is considered a service performed inside the U.S. for tax and immigration purposes.
         
    • The U.S. has established tax treaties with many countries in order to help 'treat' earnings more accurately, or rather more in keeping with where the individual resides to lessen or prevent a kind of double-dipping on taxes collected, so to speak.
       
      • If the U.S. has a tax treaty with the country of residence of the independent contractor, they may be eligible for reduced U.S. tax assessed on their contractor pay, or exempt all together, depending on the treaty and also the type of work. 
         
        • The Office of Accounting has a tax team that helps to establish tax treatment, including offering appointments (when possible) to meet with a person who is, for example, from another country and coming to UT to do some work.
           
      • If the U.S. does not have a tax treaty with the country of residence of an independent contractor, the contract payment is assessed U.S. tax at the default rate for nonresident aliens, which is currently set at 30%.
         
        • Note: It is our job to flesh out the accurate status of each individual to ensure compliance to university, local, state and federal guidelines and regulations, as well as ensure the appropriate tax code is applied in every situation we help to process.
           

Word of Warning: We've linked IRS resources to this page in case you need to follow the trail, but those resources can quickly lead you down a rabbit hole that will have you regretting most of your life choices. Be selective with those links!

• The IRS maintains several webpages devoted to categorizing and outlining treaties.
   
  • They've grouped the countries/treaties into several overarching tables, for ease of navigation. For example, if you know you have an IC/Consultant from Australia who will be performing contractor work as an individual, you can pull up Table 2, which shows all the countries included in an 'exempt status' that allows for sidestepping U.S. tax rates being levied on those payments. 
     
  • They maintain a complete A to Z list of countries linked to the treaties, conventions or other documentation related to tax considerations, along with a table (Table 3) for easier access. (Don't do it! Just say no! Friends don't let friends click on tax treaty webpages!)
     
• The U.S. Department of Treasury keeps a similar, somewhat easier to navigate A to Z list of treaties per country.
   
• Establishing tax treaties creates the ability to 'treat' the earned funds more in keeping with where the earner resides, sidestepping paying U.S. tax set at the default rate specifically for nonresident aliens. 

There are three main components and a few sub-components that come along with paying Independent Contractors (ICs) and Consultants:

1. Establish Identity
2. Submit Contract
3. Process Payment
   
   And they must be handled in exactly that order. There is no workaround for this.

Establishing Identity

In order for an individual (or entity) to be paid with UT funding sources, they have to exist in our finanical system. That means establishing a profile that makes clear their status and how they are to get paid. To accomplish this, the university has a team called Vendor Services. 

MORE COMING SOON! (sorry, ya'll - this page isn't finished yet!)

Coming soon!