Are Your Nonprofit's Workers Employees Or Independent Contractors?

Many nonprofit employers use independent contractors to supplement their regular workforces.  In general, there’s nothing wrong with that but it is critical that nonprofit organizations (NPOs) properly distinguish between employees and independent contractors.  Federal and state governments are increasing their efforts to identify and correct independent contractor misclassifications. Government agencies are more aggressive in investigating claims of misclassification and prosecuting offending employers, including NPOs.  The consequences for violations can be significant. 

What’s the Potential Liability?

Nonprofits that misclassify workers as independent contractors may be subject to significant federal, state and local tax liabilities (plus interest and penalties).  NPOs may face additional reporting and withholding obligations and potential liability for back wages, overtime pay, and unpaid unemployment benefits.  While the penalties are steep and designed to encourage compliance from all employers, the effect on tax-exempt status, public relations and therefore the ability to raise funds is of particular importance to NPOs.  

IRS and DOL are Watching

The Internal Revenue Service (IRS) is currently in the middle of a three-year audit initiative targeting 6,000 randomly selected employers, including NPOs.  One area of focus for the IRS examiners is the classification of workers as independent contractors.  In addition to worker classification issues, the IRS will focus on reimbursed expenses, executive compensation, and backup withholding.

The Department of Labor (DOL) is also increasing its focus on worker misclassification.  The DOL will continue to increase enforcement activity and has dedicated significant resources to focus on worker misclassification and the recovery of related unpaid taxes.

Bottom Line

In order to minimize liability, employers that use independent contractors should perform an audit of its workforce classification process to ensure compliance with applicable federal and state laws. 

If you're facing this issue or have questions about employee classification,  contact me or visit my website.