From time to time, we share previous content that has enduring significance for nonprofit organizations. The following blog post was originally published on 6/6/18 and has been lightly refreshed.
Many nonprofit organizations rely on a variety of staff and volunteers to keep operations running smoothly. For federal employment tax purposes, it's extremely important to classify your workers correctly. If your worker qualifies as an employee, you must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on their wages. For contractors, you do not generally have to withhold or pay any taxes - the contractor is responsible for their own self-employment taxes. Internships are another type of employment classification (usually unpaid), with strict guidelines to ensure the worker qualifies as an intern under the Fair Labor Standards Act.
The rules can get even murkier when it comes to classifying seasonal employees, like high school or college students you've hired for the summer. Although you may be tempted to avoid the payroll paperwork by classifying these student workers as contractors or interns, these designations actually have very specific requirements that must be fulfilled. To avoid unintentionally violating labor laws, you must familiarize yourself with the rules around worker classifications and labor laws. Below are four of the most common classifications for nonprofit workers:
Volunteers give their time and energy to an organization with no expectation of compensation. Their services are performed for civic, charitable, or humanitarian reasons - not to further their own careers. While volunteers may experience some residual career benefits from volunteering (for example, to fill a gap in their work history or to make networking connections), the primary purpose of their labor is to help the organization’s cause.
Internships are designed to provide work experience relevant to the intern’s field of study or career. Interns are usually students; however, not all student workers can be classified as interns. Like volunteers, interns must clearly understand there is no expectation of compensation.
If you do pay your interns in exchange for their labor, they may be considered employees instead - and therefore subject to employment taxes. While it's not impossible to offer paid internships, you must be very careful to comply with labor laws. In early 2018, the Department of Labor announced they were scrapping the six-factor test that had been used for years to determine whether a paid worker is an intern or an employee. Today, the DOL uses a flexible seven-factor "Primary Beneficiary" test. The new test focuses more heavily on the economic realities of the relationship, and determining who benefits the most. If the worker benefits more than the employer, they can likely be classified as an intern, rather than an employee.
High school students and other minors may be limited in the type of work and number of hours they can perform. Make sure your organization is complying with federal and state child labor laws.
Contractors & Employees
According to the IRS, an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done or how it will be done. There are three factors that can help you determine whether your worker is a contractor or an employee: behavioral control, financial control, and the relationship of the parties.
Behavioral Control - If you can tell your worker when to work, where to work, what tools to use, or what supplies to purchase, then the worker is probably an employee. Contractors, on the other hand, are not provided with detailed instructions, training, or performance evaluations; they use their own chosen methods to deliver an agreed-upon result.
Financial Control - If you have the right to direct or control the financial and business aspects of the worker's job, then the worker is probably an employee. However, if your worker has the opportunity to make a profit or loss; if they are free to seek out other business opportunities; or if they are paid a flat rate per job, rather than an hourly or weekly rate, then they are probably a contractor instead.
Relationship of the Parties - If you provide fringe benefits (such as insurance, pension, or vacation pay), and have an expectation that your business relationship will continue indefinitely, then the worker is probably an employee. Contractors are usually hired for a specific project or period of time, which is often described in a written contract. But be careful - having a written contract does not automatically mean the worker is classified as a contractor.
The consequences of misclassification are severe. If you've been found to have incorrectly classified your workers, you could be liable for back taxes. The Voluntary Classification Settlement Program (VCSP) offers eligible organizations an opportunity to voluntarily come forward and reclassify your workers as employees with partial relief from federal employment taxes. Before taking on any new workers - especially part-time or temporary workers - be sure to educate yourself about employment classifications and current labor laws.