Employee or Independent Contractor? Is your nonprofit making the correct classification?
There is a very different business relationship between a nonprofit and an employee than between the organization and an independent contractor.
For example, if someone is doing work for you and you tell them when and where to do the work – generally, that’s an employer/employee relationship. The IRS talks about behavioral control or instruction being characteristics of an employer/employee relationship:
• When and where to do the work.
• What tools or equipment to use.
• What workers to hire or assist with the work.
• Where to purchase supplies and services.
• What work must be performed by a specific individual.
• What order or sequence to follow.
Independent contractors are just that – independent.
Independent contractors are just that – independent. They have set up their own business. They have their own office or facility (in many cases). They make their services available to other prospects and clients.
Your organization needs to correctly classify employees and independent contractors. What the IRS frowns upon and penalizes is identifying an employee as an independent contractor.
This is the case even with temporary employees. Some companies think that if they only bring someone on in a temporary basis, it is ok to classify them as a contractor. This is not the case and the person should be classified as an employee even if they meet the criteria for an employee.
I just completed an audit from a governmental entity which included a 3 year look-back audit period. Even though we only handle tax matters for this company, when I first met this company, I advised them to put their “contractors” on their payroll. This saved them the tax, penalties and interest that would have accrued against them. Many times these governmental entities share information. So if you are audited by the state and the findings are that you misclassified employees, then the Internal Revenue Service is notified. Also, keep in mind that the officers of a company can be held personally liable for not paying payroll taxes. It is important that you classify employees correctly and keep current on your payroll tax obligations.
Nonprofit tax responsibilities
It’s likely that you are exempt from federal income tax – many nonprofits are. While you may not have to pay federal income tax, you must still withhold federal income tax from the pay of your employees. And, there are special social security, Medicare, and FUTA tax rules that apply to the wages you pay your employees.
Employee or Independent Contractor?
The 2017 IRS Employer’s Supplemental Tax Guide is the key resource for you. It covers the following topics and more:
• Who Are Employees?
• Employee or Independent Contractors?
• Employees of Exempt Organizations
• Religious Exemptions and Special Rules for Ministers
• Wages and Other Compensation
• Sick Pay Reporting
• Special Rules for Paying Taxes
• Pensions and Annuities
• Alternative Methods for Figuring Withholding
Why scramble and stress over accounting duties when you can outsource to Unalp? Our services are tailored to your needs – you gain clarity, control, and confidence about your organization’s numbers with Unalp. We also look for ways our clients might better manage cash flow and revenue cycles to ensure that expenses are accounted for. You’ll enjoy the professional-to-professional access with Unalp. You might even find yourself wishing you had outsourced sooner.