Payments made by the university to individuals are most commonly classified as payments made to employees, payments made to independent contractors, or scholarships.
Generally, an employee is an individual who performs services for you who is subject to your control, based on the IRS's three aspects of control. The IRS's three factors of control require an analysis of the payor's behavioral control, financial control, and relationship between the parties. Generally, payments to students in exchange for services will be considered wages paid to an employee.
An independent contractor is an individual who performs services for you, but is free from control by the payor. Typically, independent contractors operate a trade or business based upon a specialty they have developed.
A scholarship is an amount paid to or allowed for the benefit of a student to aid the individual in pursuing their studies. It does not apply to any portion of any amount received which represents teaching, research, or other services required to be provided by the awardee.
In the case of these three payment types, the university is generally required to withhold taxes only on payments made to employees. However, misclassifying wages as payments to an independent contractor or a scholarship can result in substantial penalties and assessments.
Disclaimer: The University of Central Florida and its related organizations do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.