You’ve just hired an independent contractor or consultant to work on a special project. Did you first evaluate whether the worker should be treated as an employee instead? Does it matter?
Yes, it matters because the government makes a distinction between the two classifications of workers (independent contractor/consultant versus employee) and requires nonprofits to treat them differently for payroll and withholding purposes. Also, insurance issues will surface when the consultant is injured and tries to file a claim for workers’ compensation. Is she covered? It depends on whether she is a consultant – or not.
Federal and state governments have regulations that define who is an independent contractor/consultant and who is an employee. If a nonprofit misclassifies a worker, the nonprofit is at significant risk. There are serious penalties and back taxes owed when a nonprofit incorrectly treats someone as an independent contractor/ consultant, when in fact the worker should have been classified and treated as an employee.
Additionally there are risks to misclassifying a worker as an exempt employee, when s/he should be classified as non-exempt. For tips and tools for avoiding misclassifying workers, read more about this topic from the resources available on the National Council’s website.
IRS guidance provides that someone is properly classified as an independent contractor/consultant “when the nonprofit has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.” We hope you feel comfortable with the distinction between independent contractors/consultants and employees. If you are not sure, here are some resources to help you classify workers correctly and avoid associated risks:
- Guidance from the IRS on everything you’ve always wanted to know about how to pay independent contractors correctly.
- Distinguishing between employees and independent contractors (written by the IRS for small business owners, but equally applicable to nonprofits.)
- IRS Publication 15-A (2010) provides guidance on classifying workers and includes a special section on tax issues relating to employees in exempt organizations.
- IRS Ministers’ Audit Guide (highlights special rules for religious organizations)
Spread the word: Deadline extended to October 15th for nonprofits to file their 990s.
Please join the State Association network of the National Council of Nonprofits, the IRS, and others to spread the word – to small nonprofits in particular – that they need to file with the IRS annually. Most urgently, many small nonprofits will lose their tax-exempt status if they have not filed in the past 3 years and fail to file by October 15th of this year. The IRS has announced a one-time relief program for nonprofits required to file the 990-N or 990-EZ that missed their deadline earlier this year.
- This short video from the IRS explains the filing deadline.
- The one-time relief program will not help organizations required to file the Form 990 or Form 990-PF. Their tax-exempt status will be automatically revoked if they fail to file for three consecutive years.
- Guidance from Guidestar.org explaining what you need to know about revocation of tax-exempt status.
- Electronic Filing Tool: Organizations with gross revenue under $100,000 may file their IRS Form 990-EZ electronically at no charge through the Urban Institute’s eFile program.