Many nonprofit organizations do not have the funds to pay a full-time staff, or even one full-time worker. They often rely on part-time help.
Before the organization can determine how to treat payments for any work performed, the organization must first know the business relationship that exists between the organization and the person performing the services.
The person performing the services may be (1) an employee or (2) an independent contractor.
Why does it matter?
Determining the appropriate business relationship is important because the status determines if the organization withholds and pays taxes for the worker.
If the worker is an employee, the organization must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
For independent contractors, the organization does not generally have to withhold or pay any taxes on payments to independent contractors.
What are the consequences of an incorrect determination?
Nonprofits can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor.
How is a determination made?
Several factors relating to the relationship between the organization and the individual performing the services must be assessed. No set number of factors or a specific factor makes a determination. Instead the entire relationship is examined.
Below are some factors to consider that fall under three broad categories:
1. Behavioral: Does the nonprofit organization control what the worker does and how the worker does her job?
2. Financial: Are the business aspects of the worker’s job controlled by the nonprofit organization or the worker? Are expenses reimbursed? Who provides tools/supplies for the job?
3. Type of Relationship: Is the work performed a key aspect of the business?
- Control and Instructions. If the individual is required to comply with other persons’ instructions about when, where, and how he or she is to work, she is ordinarily an employee. The more detailed the instructions are that the worker is required to follow, the more control the business exercises over the worker, and the more likely the business retains the right to control the methods by which the worker performs the work. Absence of detail in instructions or training reflects less control.
- Services Rendered Personally. An employee often does not have the ability to assign his work to other employees; an independent contractor may delegate the work to others.
- Continuing Relationship. If a business engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence of its intent to create an employment relationship. A “continuing relationship” between employer and employee may exist even where work is performed at frequently recurring although irregular intervals.
- Set Hours of Work. The establishment of set hours of work by the principal for whom the services are performed is a factor indicating control and an employment arrangement. An independent contractor ordinarily establishes his own hours and schedule.
- Full Time Required. If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An employee normally works full time for an employer. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
- Payment by Hour, Week, Month. A worker who is compensated on an hourly, daily, weekly, or similar basis is guaranteed a return for labor. This is generally evidence of an employer-employee relationship, even when the wage or salary is accompanied by a commission. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
- Payment of Business and/or Traveling Expenses. If the person or persons for whom the services are performed ordinarily pay the worker’s business and/or traveling expenses, the worker is ordinarily an employee. If expenses are not reimbursed, then the opportunity for profit or loss exists, and suggests an independent contractor relationship.
- Furnishing of Tools and Materials. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
- Realization of Profit or Loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses. The ability to realize a profit or incur a loss is probably the strongest evidence that a worker controls the business aspects of services rendered and is therefore an independent contractor rather than an employee.
- Worker’s Ability to Work for More Than One Firm at a Time. If a worker performs services for a multiple of unrelated firms at the same time, that factor generally indicates that the worker is an independent contractor. Also, the fact that a worker makes his services available to the general public on a regular and consistent basis indicates an independent contractor relationship. An independent contractor is generally free to seek out business opportunities. As a result, independent contractors often advertise, maintain a visible business location, and are available to work for the relevant market.
Type of Relationship
- Integration. If the worker’s services are an integral and important part of the operations of the business, it suggests that the worker must be subject to the direction and control of management, and, consequently, is an employee of the company. This is a key factor in why many executive directors, even part-time executive directors, may be considered employees.
What can I do if my nonprofit made an incorrect determination?
How non-profits should classify their part-time staff is determined by a variety of factors. If your organization has made a mistake, you may have an opportunity to correct it.
The IRS has instituted the Voluntary Classification Settlement Program to provide an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes.