Using independent contractors, consultants the right way

The National Council of Nonprofits has launched a new monthly newsletter, Nonprofit Knowledge Matters. The August edition focuses on hiring independent contractors and consultants, whether such workers should be treated as employees instead and why it matters.

The government requires nonprofits to treat independent contractors or consultants differently from employees for payroll and withholding purposes. In addition, there are insurance issues that will surface if a consultant is injured and tries to file a claim for workers’ compensation.

The Internal Revenue Service defines the classification of consultant or contractor as: “when the nonprofit has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.” If a nonprofit misclassifies a worker, the organization is at significant risk, such as penalties and back taxes.

There are also risks to misclassifying a worker as an exempt employee, when he or she should be classified as non-exempt. For tips and tools for avoiding misclassifying workers, read more about this topic from the resources available on the National Council’s website.

We hope you feel comfortable with the distinction between independent contractors/consultants and employees. If you are not sure, here are some resources to help you classify workers correctly and avoid associated risks:

• Guidance from the IRS on everything you’ve always wanted to know about how to pay independent contractors correctly. 
• Distinguishing between employees and independent contractors (written by the IRS for small business owners, but equally applicable to nonprofits.)
• IRS Publication 15-A (2010) provides guidance on classifying workers and includes a special section on tax issues relating to employees in exempt organizations.
• IRS Ministers’ Audit Guide (highlights special rules for religious organizations)