As your nonprofit grows, so does the need for additional support to help fulfill your mission. One of the most important decisions nonprofit leaders face is how to classify team members, should they be W-2 employees or independent contractors? Misclassification can lead to serious legal and financial consequences, so understanding the difference is crucial when considering W-2 vs independent contractor for nonprofits.
What’s the Difference?
The key distinction between a W-2 employee and an independent contractor lies in control and independence.
- W-2 Employees work under your organization’s direction and control. You determine their schedule, provide training, and supervise their work. These employees are on your payroll, and your nonprofit is responsible for withholding income taxes, Social Security, and Medicare, along with paying unemployment and other benefits where applicable.
- Independent Contractors (also referred to as 1099 workers) operate independently. They typically set their own hours, use their own tools, and control how they complete the work. You are not required to withhold taxes, provide benefits, or pay for unemployment insurance.
Why Does It Matter?
Incorrectly classifying an employee as an independent contractor can result in issues, especially when discussing W-2 vs independent contractor for nonprofits:
- IRS Penalties and Back Taxes
- State Labor Law Violations
- Wage and Hour Lawsuits
Nonprofits, even with the best intentions, aren’t exempt. That’s why it’s essential to understand not just how your worker functions day-to-day, but also how their role is defined under federal and state labor laws.
Factors to Consider
Did you know the IRS uses what is called the Common Law Test? When analyzing W-2 vs independent contractor for nonprofits, this test evaluates three main categories to help determine a W2 employee from an independent contractor. Here are some questions to ask in each category:
- Behavioral Control: Do you control how and when the worker does their job?
- Financial Control: Are expenses reimbursed? Who provides tools or supplies?
- Type of Relationship: Is there a written contract? Are there benefits or a long-term expectation?
The Department of Labor and state agencies may have additional or stricter guidelines, especially in states like California or New York.
The responses to these questions will allow you to really dive into the type of workers that is best for the organization.
Which Is Right for Your Nonprofit?
- Choose W-2 Employees when the role is ongoing, requires regular hours, and the individual is integrated into your core operations (e.g., program coordinators, admin staff).
- Choose Independent Contractors when the work is project-based, short-term, or highly specialized (e.g., graphic designers, grant writers, IT consultants).
Being strategic about staffing supports your nonprofit’s mission without risking compliance issues. Consider the options thoughtfully, particularly when weighing W-2 vs independent contractor for nonprofits.
Budget
Before finalizing the type of worker for the nonprofit, be sure to check your budget. A W2 employees has fees associated with areas such as payroll and benefits, where an independent contractor does not. The organization budget may allow for a salary but it also needs to be able to cover the associated fees. For an Independent contractor, while their fee may be higher than what you would pay an employee, there are no additional fees associated with their work.
Stay Compliant and Focused on Your Mission
Navigating the W-2 vs. contractor classification isn’t just about legal compliance, it’s about building a strong, sustainable team that supports your mission. If you’re unsure how to classify your workers or need help setting up compliant HR systems, BryteBridge is here to help.
For more information, join BryteBridge Connect Membership for Live Bootcamps, Webinars, and classes. Speak to a BryteBridge Consultant today by calling 877-857-9002. What Nonprofit Leaders Need to Know
