Nonprofit Employees Versus Independent Contractors: What's The Difference?
If you're a nonprofit organization, it's crucial to classify your paid workers correctly. You might call them employees or independent contractors, but the difference is significant. Nonprofits are often confused about whether paid staff should be classified as employees (W2s) or independent contractors (1099s). Knowing the correct choice is crucial as making a quick (wrong) decision can come at a high cost.
Why is it important to know the difference?
The decision you make now can have consequences later. If you choose to classify staff as independent contractors when they are actually employees, you risk steep penalties and interest. These unexpected fines can be detrimental to a nonprofit utilizing every dollar raised and maximizing every dollar spent. Not only can these fines derail an organization's ability to deliver services, but they can bring down an organization completely.
What is the difference?
Employees are the organization's paid staff. This includes management and administrative positions as well as temporary workers. While volunteers are typically temporary as well, they donate their work pro-bono or for free. Paid workers receive payment for their work. A worker must be paid at a set rate (e.g., a base salary) to be an employee. However, an independent contractor will typically set their own rate or pay structure, set their own schedule, and deliver a service or product with little control from the nonprofit throughout the process.
““If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker””
Performance-based versus base salary
Performance-based compensation or bonuses are not considered ethical or viewed favorably by the IRS. An example of performance-based compensation is paying a grant writer a percentage of any grants won. This type of pay arrangement can lead to inappropriate compensation (either too high or too low) based on an individual's role. Excessive compensation can lead to the IRS taking a closer look at an organization's accounting as a whole. Websites like Glassdoor.com, Salary.com, or your state's nonprofit association can help determine a fair salary for any role necessary to your organization. It's important to remember that salaries vary by a nonprofit's location and size.
How to classify your staff
According to the IRS, the following conditions determine if a worker is an employee or an independent contractor:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
Getting help
As with many aspects of running a nonprofit, HR and payroll can be complicated and redirect precious resources from doing the organization's work. This is where fiscal sponsorship may make the most sense for a charitable project. Alternatively, there are many options for outsourcing HR and payroll, and it may cost significantly less than trying to manage these services themselves.
Conclusion
For long-term sustainability and success, a nonprofit must know who on their team is an employee and who is an independent contractor. Even a nonprofit that is just starting needs to know the difference. As there is a high price to pay for non-compliance, it is wise for every organization or charitable group to ensure they are doing it right
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References
United States Government. (2017). Independent Contractor (Self-Employed) or Employee? | Internal Revenue Service. Irs.gov. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
