As an advisory board or fiduciary board member one of your roles is to help a company avoid foolish and unnecessary mistakes. I call this noise prevention. As someone who has served as a CFO I pay heightened attention to how contractors and employees are classified. The cost is just to0 steep to be wrong.
As a refresher, here are the three characteristics the IRS uses to determine the relationship between company and its workers:
- Behavioral Control covers facts that show whether the nonprofit has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the nonprofit has a right to direct or control the financial and business aspects of the worker’s job.
- Type of Relationship factor relates to how the workers and the nonprofit perceive their relationship.
- If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
- If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms. If you really aren’t sure, request an IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS, available on the IRS website.
Misclassification can also create insurance and unemployment issues. So if you’re on either an advisory board or fiduciary board, what are you doing to keep the noise to a minimum?
Learn more about advisor responsibilities and how to set-up an advisory board in 90-120 days: Advisory Board Kit: A Comprehensive Guide to Establishing an Advisory Board. Do you serve on a nonprofit board of directors? Then see my blog posts on governance over on the Nonprofit Toolbox site.
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