Nonprofit Knowledge You Need: Independent Contractors and Consultants

NYCON's national association, The National Council of Nonprofits, offers Nonprofit Knowledge Matters and a look at Contractors and Consultants:

You’ve just hired an independent contractor or consultant to work on a special project. Did you first evaluate whether the worker should be treated as an employee instead? Does it matter?

Yes, it matters because the government makes a distinction between the two classifications of workers (independent contractor/consultant versus employee) and requires nonprofits to treat them differently for payroll and withholding purposes. Also, insurance issues will surface when the consultant is injured and tries to file a claim for workers’ compensation. Is she covered? It depends on whether she is a consultant – or not.

Federal and state governments have regulations that define who is an independent contractor/consultant and who is an employee. If a nonprofit misclassifies a worker, the nonprofit is at significant risk. There are serious penalties and back taxes owed when a nonprofit incorrectly treats someone as an independent contractor/ consultant, when in fact the worker should have been classified and treated as an employee.

Additionally there are risks to misclassifying a worker as an exempt employee, when s/he 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.

IRS guidance provides that someone is properly classified as an independent contractor/consultant “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.” 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)
  

Spread the word: Deadline extended to October 15th for nonprofits to file their 990s.
Please join the State Association network of the National Council of Nonprofits, the IRS, and others to spread the word – to small nonprofits in particular – that they need to file with the IRS annually. Most urgently, many small nonprofits will lose their tax-exempt status if they have not filed in the past 3 years and fail to file by October 15th of this year. The IRS has announced a one-time relief program for nonprofits required to file the 990-N or 990-EZ that missed their deadline earlier this year.

• This short video from the IRS explains the filing deadline.
• The one-time relief program will not help organizations required to file the Form 990 or Form 990-PF. Their tax-exempt status will be automatically revoked if they fail to file for three consecutive years.
• Guidance from Guidestar.org explaining what you need to know about revocation of tax-exempt status.
• Electronic Filing Tool: Organizations with gross revenue under $100,000 may file their IRS Form 990-EZ electronically at no charge through the Urban Institute’s eFile program.

Some Pork Projects Survive

The Poughkeepsie Journal reported that Gov. David Paterson's veto pen has yet to end spending for legislative earmarks, state records show.

The state in July signed off on $12.5 million in member items for lawmakers' hometown projects — including $438,000 for a senior center in Queens, $100,000 for a group opposed to a major power line in central New York and $7,500 for the Rochester crime stoppers program.

In all, 609 member items were signed off by the state Comptroller's Office in July, a review by the Journal's Albany bureau found. An additional 57 projects totaling nearly $1 million were approved in just the first few days of August.

The spending comes even after Paterson held marathon sessions last month to personally sign 6,709 vetoes of lawmakers' pork-barrel projects approved in last year's budget, a total of about $190 million. But the vetoes haven't shut off the spending spigot quite yet.

State law allows the money from last year's budget to flow until Sept. 15. So nonprofits and local governments, who were banking on the money before Paterson's surprising vetoes, are making a dash for the cash before it's too late.

"We're hearing from groups all over that they are scrambling right now to get all their vouchers in and work completed," said Ron Deutsch, who heads New Yorkers for Fiscal Fairness, a group that works with non-profits. "Everyone's in scramble mode right now."

The stakes are high from some groups that rely on the member items to fund programs and, in some cases, to stay in business.

Assemblyman Marc Molinaro, R-Red Hook, said he doesn't oppose Paterson's vetoes of the member items, but the governor should have done it last year — before the groups were counting on the money.

"I have a concern about the governor vetoing dollars that have been awarded and, at the very least, were in the process of being contracted," he said.

Some groups said they have been waiting for reimbursements from member items pledged for their projects last year. Read more here.

Legislators Get Back Pay! How About You?

The New York Nonprofit Press offered this relevant perspective now that the NYS Budget has been passed:

After finally completing passage of New York State’s FY2010-2011 budget – 125 days late -- New York State legislators have received checks covering back pay averaging $26,500. How about your agency?

According to an article in today’s City Hall, salaries and other monies owed to Assembly Members and State Senators – a total of $7 million – were paid out in full on August 3rd – the day they voted on the final budget bills. Legislators, according to the article, are now catching up on their mortgages and paying off other loans – if not simply dropping the cash into their savings accounts.

By contrast, there are widespread reports that New York State had taken no action to make payments to nonprofit contractors for services provides since April 1st when the new fiscal year began – even when there were existing contracts and, therefore a legal obligation to make payment.

Last week, NYNP reported on several agencies who were already owed as much as $1 million for services provided during this fiscal year. A Division of Budget spokesperson indicated that cash flow problems were standing in the way.

Now that the budget has been passed, when will payments under existing contracts be made to providers? And, how quickly can the state act to process and register new contracts to provide payment for critical services?

Nonprofits have mortgages and loans to pay off too – not to mention the salaries of staff who never stop providing services, budget or no budget.

What’s happening at your agency? Email your comments to editor@nynp.biz.