Mission Matters Insights
Classifying Workers as Employees & Independent Contractors- Watch OutJanuary 21, 2013
Simultaneous dual classification could be a sticky situation with the IRS.
One of the recurring questions in the not-for-profit area is how to classify workers. Are they employees or subcontractors? This issue appears more frequently in nonprofits than in the general business community because nonprofits frequently receive special grants that require retaining grant-specific workers for the limited duration of the grant. In addition, employees of nonprofits sometimes take on other tasks and organizations have frequently viewed those tasks as subcontractor work separate from the employee work that the worker has done and continues to do for the agency.
We have generally advised against having a situation where an organization was simultaneously engaging a worker as both an employee and as an independent contractor. For example, an agency has a maintenance worker who agrees to work nights and weekends painting the agency. The compensation for the painting work is negotiated and the employee is considered an independent contractor for this work while continuing to be a full-time maintenance employee. In our opinion such an arrangement is risky for the agency and we suggest against treating the worker as anything but an employee. Traditionally, if additional work is done on nights and weekends, the agency should compensate the employee in accordance with federal and state laws on overtime and all compensation should be reported on the individual’s Form W-2.
Late in 2012, the IRS issued an Information Letter (Info Letter 2012-0069) noting the potential for a worker to be both an employee and independent contractor simultaneously on separate consulting projects. Some of the nonprofit press has picked up on this and as usual, under reported the complexity and nuances of the IRS Information Letter.
While the IRS admitted that it is theoretically possible that an employee could, at the same time, serve their employer as an independent contractor, we do not believe that not-for-profit organizations should pour through this crack in the door of the employee/independent contractor issue. Employers should not attempt this simultaneous dual classification without consultation and assistance from their tax advisor.
If you have questions about how to classify your workers contact any member of the NFP Services Team.
As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.