Classifying your workforce can be difficult. Misclassification of employees and independent contractors is a common mistake made by many nonprofit organizations. This misclassification can end up costing the organization a significant amount of money in IRS penalties, state penalties and back taxes.
So how do you make the distinction? Like most situations in today’s world, nothing seems to be black and white. Digging into whether your worker is an independent contractor or employee can be tricky. Here are a few guidelines to help you make the distinction:
Once a determination has been made on whether an individual is an employee or an independent contractor, be sure you are following all filing and withholding requirements. For any employees, you should be withholding federal taxes, as well as state and local, if applicable. If you are working with an independent contractor and you have paid them more than $600 in the calendar year, you need to file Form 1099-MISC and report their income. You should also remind them they are personally responsible for all income taxes and insurance coverage.
As stated above, this distinction can be very difficult to make and this is an area the IRS has been recently scrutinizing so it is important you are classifying your workforce appropriately. Contact your GBQ advisor with any questions.
Article written by:
Alicia Hammersmith, CPA