| By now, news of the changes by the IRS to its Form | | | | economic aspects of the worker's job. |
| 990 for non-profits has surely reached many | | | | The financial control factors fall into the categories of:o |
| executive directors and nonprofit boards. This article | | | | Significant investmento Unreimbursed expenseso |
| will focus on an issue that is easy to inadvertently | | | | Opportunity for profit or losso Services available to the |
| misconstrue: the classification of a worker as an | | | | marketo Method of payment |
| independent contractor versus an employee. | | | | 3. Type of relationship refers to facts that show how |
| Making the correct determination between whether a | | | | the worker and business perceive their relationship to |
| worker is classified as an independent contractor or an | | | | each other. The factors, for the type of relationship |
| employee can be a bit tricky, which is why so many | | | | between two parties, generally fall into the categories |
| non-profits make mistakes is this specific area. In fact, | | | | of:o Written contractso Employee benefitso |
| in past non-profit audits, this is cited as one of the | | | | Permanency of the relationshipo Services provided as |
| largest areas of non-compliance, resulting in millions of | | | | key activity of the business |
| dollars of penalties and interest on back taxes owed | | | | These rules and regulations may appear to be |
| by the non-profit. Although this issue is not on the new | | | | complicated, but reasonableness tests by a seasoned |
| 'hot list' of topics the IRS will scrutinize, it is likely to | | | | executive director, together with reading further |
| continue to be an ongoing area of interest during future | | | | information available on the IRS web site should enable |
| audits. | | | | the organization to make the correct decision. If |
| What is an independent contractor and how is the | | | | questions remain, the executive director should contact |
| classification different for employees? | | | | legal counsel, an accountant, or a seasoned consultant. |
| Per readily available information published by the IRS: | | | | An easy example of an independent contractor that |
| "The general rule is that an individual is an independent | | | | has been incorrectly classified includes: a worker that |
| contractor if you, the person for whom the services | | | | receives employee benefits, receives evaluations, is on |
| are performed, have the right to control or direct only | | | | the job for a long time, does not offer services to |
| the result of the work and not the means and | | | | other employers, receives a paycheck and a W-2 |
| methods of accomplishing the result." | | | | instead of submitting an invoice and receiving a 1099, |
| The IRS further states: | | | | receives training provided to other employees in the |
| In determining whether the person providing the service | | | | organization, follows regular work hours, and receives |
| is an employee or an independent contractor, all | | | | daily supervision from the employer. |
| information that provides evidence of the degree of | | | | You can contrast this with an independent contractor |
| control and independence must be considered. | | | | that has been correctly classified and operates as |
| Before you can determine how to treat payments you | | | | follows: the work is actually a response to an RFP, |
| make for services, you must first know the business | | | | with a specific scope and deadline, but for which the |
| relationship that exists between you and the person | | | | contractor is responsible; the contractor has several |
| performing the services. The person performing the | | | | clients for whom services are being provided; does not |
| services may be an independent contractor, a | | | | attend employee meetings or receive any benefits; bills |
| common law employee, a statutory employee, or a | | | | for his or her time through the contractor company, |
| statutory non-employee. | | | | and received payment on those invoices and a 1099 |
| Facts that provide evidence of the degree of control | | | | at the end of the year. Another good sign would be an |
| and independence fall into three categories: | | | | incorporated entity, with its own FIN, making it obvious |
| 1. Behavioral control refers to facts that show whether | | | | that the contractor is actually in the contracting |
| there is a right to direct or control how the worker | | | | business for the services provided. |
| does the work. A worker is an employee when the | | | | We again point out that the IRS is the regulatory body |
| business has the right to direct and control the worker. | | | | for non-profit entities. Compliance with the laws and |
| The business does not have to actually direct or | | | | regulations is not optional, but neither do we believe |
| control the way the work is done - as long as the | | | | that the typical nonprofit is adequately focused on the |
| employer has the right to direct and control the work. | | | | importance of IRS compliance. |
| The behavioral control factors fall into the categories | | | | Accordingly, we continue to believe that excellence in |
| of:o Type of instructions giveno Degree of instructiono | | | | compliance provides a tangible competitive advantage |
| Evaluation systemso Training | | | | when individuals or foundations are making decisions |
| 2. Financial control refers to facts that show whether | | | | on a nonprofit fund raising or grant request. |
| or not the business has the right to control the | | | | |