This debate is decades old. It”s really a game employers of all types play to avoid paying taxes. Trouble is the IRS and state revenue departments are very good at figuring out what your doing. With cash so tight right now, the last thing you need to be raising money for is to pay the back taxes and penalties arising from misclassifying your employees.
As excerpted from the IRS Exempt Organization Update, Issue 2010-20, here is the information you need to know and follow:
Here are seven things every nonprofit organization should know about hiring people as independent contractors versus hiring them as employees:
- The IRS uses three characteristics to determine the relationship between nonprofit organizations and workers:
- Behavioral Control covers facts that show whether the nonprofit has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the nonprofit has a right to direct or control the financial and business aspects of the worker”s job.
- Type of Relationship factor relates to how the workers and the nonprofit perceive their relationship.
- If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
- If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
- Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
- Workers can avoid higher tax bills and lost benefits if they know their proper status.
- Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
- You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer”s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at (800-TAX-FORM ).
Susan C. Hammond, principal of scHammond Advisors, consults with nonprofits on board governance, strategic planning, improving financial intelligence, and the formation of advisory boards or councils. She is a consultant, speaker, facilitator, and author. She previously served as the CFO for a museum and other nonprofit organizations. Susan recently published the Advisory Board Kit: A Comprehensive Guide to Establishing an Advisory Board. Hear Susan speak at the Mass Nonprofit Network 2010 Fall Conference September 27th.
Join us for our next Networking for Non-Profit Event September 30th!