Nonprofit executives often have to make decisions to ensure adequate staffing to fulfill the organization’s mission, funded projects, or to support the organization’s overall functions (e.g., accounting, IT, etc.).
Often, the decision between hiring an employee or securing an independent contractor is based on workload or administration of time-bound projects, ramping up for busy seasons, planned and unplanned absences, and skill-specific needs.
However, making decisions on adequate workforce should also include assessing how workers should be classified.
The IRS has provided broad guidance that can aid nonprofits in determining if the newly-hired independent contractor should in fact be a W-2 employee. The three questions that need to be answered are:
- Who has behavioral control? Basically, does the employer have the right to tell the worker what to do and how to do it? For instance, does the nonprofit control what tools or equipment is being used, the sequence of activities to follow, or where to perform the work?
- Who has financial control? Are the services of the independent contractor widely available to others? Does the worker send invoices after services are performed or does the nonprofit control the frequency of compensation? Are business expenses of the independent contractor reimbursable?
- What is the nature of the relationship between the parties? For example, does the nonprofit provide the independent contractor employee benefits? Are the services performed by the independent contractor integral to the nonprofit’s activities? Is there a contractual agreement for the relationship that specifies the nature of work, timeframe for completion, and relevant employee-type benefits offered?
If your nonprofit indeed plans to hire an independent consultant, then be sure to:
- Establish written agreement specifying that this is an independent contractor relationship
- Grant as many freedoms to the independent contractor as possible, including right to set work hours, hire assistants, and work for multiple businesses
- Set a fixed term with no (or limited) automatic renewal provisions
- Affirm, in the written agreement, that the contractor has responsibility to report the income and remit all federal and state employment taxes for fees paid
- File all required 1099 forms
- Use consistent classification across all workers
Once you’ve answered the question and considered all of these provisions, you’ll have the confidence needed to decide how a work should be classified.*
*Trifecta Advising is not a human resources agency. This blog is designed to assist in the decision-making process. Nonprofits should consult their human resources support team for additional guidance on the classification of all workers according to federal guidelines.