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How to Differentiate an Independent Contractor from a Nonprofit Employee

Technical differences between nonprofit employees and independent contractors are reflected in how you hire, pay, and manage them. Independent contractors are almost always paid a flat fee or hourly rate for their work, ideally on a schedule that’s set out in a contract that specifies the work to be done and the fee.

Although you don’t have to withhold federal and state payroll taxes, you need to file an IRS Form 1099 that records the amount paid over a full year (usually a calendar year) and the contractor’s Social Security number or federal tax ID number (EIN).

Proceed with caution, because there’s often a thin line between an independent contractor and an employee. Just because someone works a limited number of hours each week doesn’t mean that he should be considered an independent contractor. The IRS doesn’t look kindly on trying to pass off employees as independent contractors. Here’s a short list of factors that differentiate an independent contractor from an employee:

  • Independent contractors are just that — independent. Although setting time parameters for the job is fine, contractors should be free to set their own schedules and work with little direction from the organization. They should provide their own offices and equipment.

  • If you have to provide extensive training for the contractor to do the job, chances increase that the contractor may be considered an employee. In hiring an independent contractor, you’re supposed to be engaging someone with specific expertise.

  • If a contractor is working only for your organization and is putting in many hours each week, he may be considered an employee. If you hire a contractor with the idea that the relationship will continue indefinitely, rather than for a specific period, or if that contractor provides services that are key to your regular business activity, the IRS believes you have the right to control that worker’s activities.

    To the IRS, this association looks like an employer-employee relationship.

If you think you may be pushing the envelope on this question, consult an attorney or tax specialist who can give you proper advice. Authorities are giving increasing scrutiny to the distinction between regular employees and independent contractors. The IRS may require employers who pay individuals as contractors, when they’re really employees, to pay back payroll taxes and penalties.

The IRS has defined Common-Law Rules for determining whether someone is an employee or an independent contractor. Check IRS Publication 15A, Employer’s Supplemental Tax Guide, for a definition of these rules. The publication is available on the IRS website.

If you want to hire someone for a short-term assignment or a limited number of hours, but if the work is taking place in your offices, using your equipment, and requiring your regular supervision, consider using a temporary employment agency.

The agency handles the employee’s benefits, including his employment taxes, and reassigns the employee if he’s a poor fit for the job. Although using a temp agency may cost more than hiring the person directly, the agency can help you find someone who’s qualified.

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