The IRS continues to focus on whether workers are properly classified as employees or independent contractors. Too many organizations, both for profit and not for profit, try to classify workers as independent contractors.
Here are some common misconceptions.
- Part time means independent contractor. Not true. The tax law does not make any special provision for part time workers as independent contractors. As we have stated before, what counts is whether the employer has the right to determine how, when and where the person does their job. If your organization can exercise that control, the person is an employee.
- Executive directors can be independent contractors. Just the opposite is true. Executive directors will always be employees. The Board of Directors hires and fires EDs, and has the right to define how they do their job. Whether they exercise that right is irrelevant.
- Officers – the Internal Revenue Code specifically includes officers within the definition of employees. Officers are elected by the Board, and can usually be removed by the Board. The Board ultimately determines how, when and where they do their job. They should get a w-2 form at the end of the year.
How do you protect independent contractor status? Here are some factors that will indicate to the IRS that the worker in question is truly independent:
Website -the worker has a website that indicates they do similar services for other organizations. This is one of the most important factors that the IRS looks for.
Written contract showing independence – the written agreement should lay out factors showing independence. These will include statements that the workers set the hours when they work, where they get the work done, and how they get the work done. Independent contractors are more likely to provide their own equipment, including technology such as cell phones and computers. An independent contractor should not be part of the governance structure of the organization.
Be very careful when classifying workers as employees or independent contractors. While providing benefits and paying FICA and FUTA are expensive, penalties and interest on taxes from misclassified workers can be much worse. If you truly believe that an individual is an independent contractor, make sure you have a written agreement with that person outlining how they will be paid and the factors that illustrate independence. We recommend that you have experienced counsel write or review the proposed agreement. We can assist, so please give us a call.