The University of Nebraska System is not subject to federal income tax as a dual status entity under Internal Revenue Code Sections 501(a) and 115 as a State Institution for the State of Nebraska, but the University of Nebraska System is subject to unrelated business taxable income imposed by the Internal Revenue Code (IRC) section 511(a)(2)(B).
Federal tax compliance for the University of Nebraska System includes preparation of Form 990-T: Exempt Organization Business Income Tax Return. In addition to this annual federal filing, the University of Nebraska System Tax Department is responsible for filing all Form 990, 990T, 1120, and 1065s of the subsidiary and affiliated entities for the University of Nebraska System.
The University of Nebraska System Tax Department provides consultation and guidance on federal employment filings, such as Form 1099 series filings related to Independent Contractors, Form 940 series filings related to Federal Withholding, and Form 1042 series filings related to Federal Withholding for Foreign Persons. These filings are completed and submitted by the payroll functions at individual campuses or centrally through NeBIS, Nebraska Business Information Systems.
NU System tax related questions should be submitted to tax@nebraska.edu.
Unrelated Business Taxable Income
According to Internal Revenue Service Publication 598, unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function.
Pursuant to the policy on Unrelated Business Income, faculty and staff are reminded of policy RP-6.3.10 University Business Activity:
- University mission-related business activity does not require specific approval by the Board of Regents, unless otherwise required by the Bylaws of the Board of Regents or other Regents’ policies. Mission-related business activities shall be defined as business activities which meet at least one of the following three criteria:
- The activity is deemed to be an integral part of the institution’s fulfillment of educational, research, and public service missions, or campus support functions.
- The activity is needed to provide, at a reasonable price and/or on reasonable terms, a good or service which is essential to the campus community.
- The activity is to be carried out for the primary benefit of the campus community but with consideration of the goods and services available in the total community.
- Existing unrelated business activities (as defined by Internal Revenue Service code) in operation as of September 1, 1999, are authorized to continue pending a systematic review by each campus’ administration of the nature of the activities.
- New unrelated business activities may be established and carried on only pursuant to, and in accordance with, an authorization and statement of purpose approved by the Board of Regents.
The University of Nebraska System submits a consolidated Form 990T: Exempt Organization Business Income Tax Return that combines unrelated business income for all four campuses. Tax is assessed based on this consolidated tax return.
IRC section 511(a) imposes a tax on the “unrelated business taxable income” (UBTI) of exempt section 501(c)(3) organizations.
UBTI is defined as an activity that meets three requirements:
- It is a trade or business,
- It is regularly carried on, and
- It is not substantially related to furthering the exempt purpose of the organization.
The determination of UBTI is based on all of the facts and circumstances. If an item of income is determined to be UBTI, there are modifications, exclusions, and exceptions that could potentially exclude the income from tax.
Taxable & Untaxable Examples
Generally activities listed below to University of Nebraska System students or employees are not considered UBTI, as these activities can be considered an exception to UBTI for internal party convenience under IRC section 1.513-1(e)(2). When activities are provided to the general public, it is considered outside our exempt purpose and fails to meet the convenience exception e.g., summer camps, nonstudents, nonemployees, external businesses. Please see the examples below.
Taxable:
- Advertising
- Wellness Center
- Housing
- Food Services
- Bookstore
- Laboratory Testing
- Printing Services
- Media Production
- Consulting
- Child Care
- Equipment Rental
- Conferences
- Merchandise Sales
Non-Taxable:
- Interest, Dividends and Annuities
- Capital Gains
- Royalties
- Business Conducted by Volunteers
- Sale of Donated Merchandise
- Qualified Sponsorship Payments
- Rent from Real Property
More information is available here.
Worker Classification - Employee vs. Independent Contractor
If the University of Nebraska System classifies an employee as an independent contractor without a reasonable basis for doing so, the University of Nebraska System may be held liable for employment taxes for that worker by the Internal Revenue Service.
The primary difference between an employee and an independent contractor is the level of control asserted by the University of Nebraska System. If the University of Nebraska System has the right to direct or control work, the individual is an employee.
The IRS uses three characteristics to determine the relationship between businesses and workers—Behavioral Control, Financial Control and Type of Relationship. More information on each is available below.
For questions regarding independent contractors, please contact Procure-to-Pay (P2P) on each individual campus. For questions regarding employees, please contact Payroll on each individual campus.
Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. The key difference for behavioral control is whether the University of Nebraska System has retained the right to control the details of the worker’s performance or instead has given up that right. Consider these key elements related to the individual’s duties, and use the Independent Contractor Checklist when making determinations on behavioral control.
- Who determines when and where the individual is required to do the work?
- Who determines what tools or equipment is to be used?
- Who determines the additional workers to hire to assist with the work?
- Who determines the type of work to be performed by each worker?
- Who determines the order or sequences to follow?
- Who determines and provides training and instruction for the work to be done?
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. Consider these key elements related to the business aspects of the relationship between the individual and the University of Nebraska System, and use the Independent Contractor Checklist when making determinations on financial control.
- Extent of Investment: An independent contractor often has a significant investment in the facilities and tools they use in their performance of work for others. However, a significant investment is not necessary for independent contractor status.
- Business expenses: Independent contractors are more likely to incur expenses related to the service performed that are not reimbursed by the University than are expenses incurred by employees. Fixed ongoing costs that are incurred by the contractor regardless of any work performed are especially important in determining status. However, employees may also incur expenses in connection with the services being performed that are not reimbursed.
- Availability: An independent contractor is generally free to seek business in the open market. They often advertise, maintain a business location and are available to work for the public.
- Payment: An employee is generally guaranteed a regular wage amount for hourly, weekly, or monthly periods of time, which usually is an indicator that a worker is an employee even though commissions may supplement their pay. An independent contractor is usually paid by a flat fee for a certain job but can be paid on an hourly basis in some situations such as for attorneys and accountants.
- Profit or loss: An independent contractor realizes a profit or a loss while an employee does not.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship. Consider these key elements related to the relationship between the individual and the University of Nebraska System, and use the Independent Contractor Checklist when making determinations on type of relationship.
- Contracts: Written contracts that describe the relationships intent. This is very significant if the relationship is difficult to determine.
- Benefits: If the worker is paid benefits such as insurance, pension or paid leave by the University this is an indication this person is an employee. If they do not receive benefits this does not mean they cannot be classified as an employee.
- Permanency of relationship: If a worker is engaged by the University with the expectations the relationship will continue indefinitely, rather than for a specific project or period, this is generally evidence of intent to create an employer-employee relationship.
- Daily Business Activities: If the worker provides services that relate to the daily business activity, then the University will be more likely to have the right to direct and control and would indicate an employer-employee relationship.
