When a nonprofit hires somebody, the first question they must face is whether to treat them as an employee or independent contractor. The difference is important for several reasons.
1. Do you need to withhold federal taxes?
2. What benefits, if any, do you need to provide?
The IRS is keenly interested in proper classification and has provided some guidance on how to tell the diffference. The basic question comes down to whether the organization has the right to control how and where the person does the job. It is the RIGHT TO CONTROL that counts. The more control, the more likely it is the person is an employee.
If the organization directs what hours to work, where to work, what the person does, that person is most likely an employee. If the organization provides training, this indicates the organization wants work done a certain way. The person is likely an employee. If the person can set their own hours, how the work gets done, or can work for more than one organization, that person is more likely to be considered an independent contractor.
Two examples may help. An executive director will be an employee. The Board of Directors will have the right to control hours, location and duties. A part time hire who enters computer data for your organization on hours they can set and who does it for other organizations is likely an independent contractor.
What happens if you misclassify somebody? The IRS had a program that will let you fix it at a greatly reduced cost. However, don’t contact the IRS without first seeking professional help and fully understanding the consequences.
Worker classification is an important issue, but not always an easy one. If you have questions or concerns about worker classification please give us a call.
