The most important first step to working with independent contractors is to understand how they differ from your employees. An independent contractor is an individual who performs services or work for your firm but also may perform similar services elsewhere. They are not employees of your nonprofit, and you are not responsible for paying their Social Security or Medicare taxes. The IRS has strict guidelines about what constitutes an independent contractor relationship and when it crosses the line into an employer–employee relationship.
Independent Contractors Must Be Truly Independent
According to the IRS, independent contractors must remain completely independent from supervision on their projects. In other words, the nonprofit organization paying them for services can dictate the results, but they can't dictate how, when, or where the work is performed, as is the case with a supervisor overseeing an employee.
As an example, let's take a look at an organization that hires a graphic designer to design a flyer template and advertising for upcoming community events. A representative of the nonprofit will sit down with the graphic designer and talk about ideas and concepts for the design. She will ask for the designer to produce the materials by Friday, and the two agree on a price for the work. Note that the nonprofit representative didn't ask the designer to work on the designs in their organization’s headquarters. She didn't specify how many hours the designer had to work or under what conditions the work should be completed. The designer had perfect freedom to do the work at midnight, 6 a.m., at a coffee shop, or on her couch. The only consideration was what work was to be performed and when it was due.
The key differentiator between an independent contractor and an employee is control. If the employer has the legal right to control all of the details of how the services are to be performed, the relationship may have crossed the line into an employment relationship.
Benefits of Working with Independent Contractors
Working with independent contractors is desirable for many nonprofits. They can focus their day-to-day operations on their mission while other experts and professionals are paid for their time and talents to provide much needed services.
Generally, the IRS expects businesses to look at the entirety of the business relationship to determine whether a worker is an independent contractor. The description of what constitutes an employee and an independent worker has some gray areas, and the IRS expects businesses to police themselves on this matter. If the IRS thinks you are abusing the situation, however, and hiring independent contractors to avoid hiring employees and paying the expected taxes, you will owe back taxes and Social Security and Medicare payments.
Do you want to know more about your nonprofit working with independent contractors? Contact us today.
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