Contractor Or Employee? Time To Get It Right

With the majority of my clients, I’ve been working with them year after year and it’s a great model. Siobhan Kelley is an Employment Risk Manager at the Nonprofits Insurance Alliance Group , a sponsor of both American Nonprofits and its magazine, Blue Avocado. Siobhan is one of the employees of the Group who provides free employment risk management consulting services to their member-insured nonprofits. Whether a worker is properly classified as an independent contractor or an employee is not something that an employer can just decide to do one way or another. The classification depends on the nature of the relationship. Not surprisingly, the more “independent” the worker, the more likely they are to be appropriately classified as a contractor. Even if a worker is “salaried” s/he could still be entitled to overtime for hours worked over 40 in a single work week under the federal rules.

There are also some business-to-business exemptions and referral agency exemptions and they both have their own set of specific requirements to meet the exemption. I assume from your comments that you are the founder…and will likely be a board member. That’s OK, so long as it is the rest of the board who hires you and establishes your compensation package.

Protecting Nonprofit Nonpartisanship

While they may say that nonprofits are exempt up to a certain number of employees, many consider noncompensated board members to be “employees” for purposes of calculating SUTA liability. There are so many other critical issues from workers’ compensation insurance to employee benefits to hiring practices. Using compliant employment and compensation practices goes a long way to eliminating one of the biggest areas of IRS concern. By type of payment, we mean things like straight salary or wages versus bonuses and commission. The IRS calls the latternon-linear compensation…and it isn’t too fond of it in a 501 setting.

If this person is also a board member, they should abstain from any self-dealing. Otherwise, you’ve got a case of inurement going on that could get some folks in hot water potentially. So what are the consequences of improperly paying employees as contractors? If the IRS reclassifies your workers from contractors to employees, your nonprofit will be held liable for both the employer’s and employees’ share of payroll taxes , plus very expensive penalties and interest. Then the state comes along to take their share.

The IRS will make its own assessment of whether a person is an employee or independent contractor of an organization based on the level of control the employer has over that hired person’s conduct and work. It is important for the organization to evaluate carefully before deciding how to treat the hired person.

There is phenomenal growth in using services provided third party to help fill the gaps in skills. Many people feel our labor laws are behind the curve on the new models of employment relationships. Both workers and employers increasingly desire a flexible relationship. As the average employment tenure decreases, it will be interesting to see how our employment laws adapt. Having said that, I could not recommend using a third party as an Executive Director. Employees should report to other employees, not to someone working as an independent consultant.

• It is possible to defer compensation, but that is not your decision to make.
• The IRS is generally skeptical about the classification and assumes that the organization has the power to control the time, place, and manner of execution of the duties of an executive director.
• Both workers and employers increasingly desire a flexible relationship.
• It makes for entertaining conversation, but that’s about it.
• 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.
• While they may say that nonprofits are exempt up to a certain number of employees, many consider noncompensated board members to be “employees” for purposes of calculating SUTA liability.

In your case, it sounds like you need help raising money first. I highly recommend you become familiar with our friend, Sandy Rees, and her website. She is an expert in organizational funding and her writing and materials will help you.

The answer is “maybe”…the devil is in the details on this one. In order to qualify for ministerial tax status, the significant majority of your job function would have to be ministerial in nature. It’s possible, but a much more narrow window than what you had as pastor. Since this has substantial impact on your finances, you may wish to contact us for a paid tax consultation. And I do believe employers have the right to control behaviors of the employee during working hours. If you will be on the board also, you will need to recuse yourself from votes that impact you. The amount of your salary should be based on comparable job requirements, tempered by the ability of the organization to afford it.

Exempt Organizations: Who Is A Statutory Non

Remember that the position of Executive Director is usually a hired management position, not a board position. So, if you are both a board member and prospective employee, make sure you observe arms-length requirements.

It’s not worth the risk to either your organization’s finances or reputation. 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. Absence of detail in instructions or training reflects less control. 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. The person performing the services may be an employee or an independent contractor. IRS guidance can help distinguish between employees and independent contractors; state law definitions should be checked also.

Business

(As a related note, the board should ensure they have general liability and D&O insurance in place. It’s nice to know that you’ve answered correctly, particularly on matters over which the Internal Revenue Service has authority.

My question is as follows…I work with some music recording artist that have their own label and they are interested in starting their own foundation or charity. Is this the same thing as starting a non-profit? They have many opportunities to receive funds donated to a charity, organization or foundation of their choice and I thought it would be of benefit to have a foundation in their name. Not sure I understand the question, but if you’ve been paid by the organization for services rendered, it should be considered payroll as of the date paid. In determining whether the person providing the service is a common law employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Very helpful article from an employment standpoint as well. I was classified as an independent contractor by a for profit business and when they let me go I had no way of collecting unemployment.

Reader Question: Can The Executive Director Be An Independent Contractor?

Suppose you operate a daycare and you have a clogged drain in the kitchen area. It is very unlikely that you will stand over the plumber and instruct him on how to fix your drain. But for the most part, he is in control of what he does and how he does it. Sounds like you made the right call with the two workers at your organization. And so important for nonprofit leaders to understand.

John goes on to raise $125,000 this year, and is paid a total pay package of $32,500. It’s less than what his fixed compensation would likely be, so what’s the harm? Both he and the nonprofit are assuming the risk of John doing a poor or mediocre job. Directors of a corporation – members of the governing board – are defined by statute as non-employees.

But when it comes to classifying workers as either employees or independent contractors, many nonprofit leaders select the more convenient option. Instead of holding your breath and hoping that the IRS will agree, it’s time to take stock of helpful guidance available from the IRS and the simple tips in this article. There is no time like the present to classify properly the workers who bring your nonprofit’s mission to life. I am aware of a nonprofit org that is abusing its status. The CEO has a board of directors that are supposedly his check and balances.

The IRS also uses a multi-point test to evaluate such classification issues. When the plumber is finished, you will be invoiced.

This is after 40hr per week of work, having an alarm code and getting a key to the office. Also her salary has been dropped to $100 per week, which she has to raise herself in donations. First, sorry for the delay in answering what appears to be a time-sensitive question. Second, you are right about FUTA, but watch out for SUTA. Many states have odd requirements concerning SUTA.

Nonprofit Audit Guide

But that wouldn’t hold water unless he had been assigned a fixed annual salary, which I’m guessing he didn’t have. And the game they are playing by treating employees as contractors will catch up with them eventually…and when it does, it will be very, very expensive indeed. Don’t take chances that can greatly harm your nonprofit.

Tax Reform

In the long run, a cautious approach serves the nonprofit well. The National Council of Nonprofits is a proud 501 charitable nonprofit. Stay up-to-date with the latest nonprofit resources and trends by subscribing to our free e-newsletters.