Last Reviewed/Updated 10/21/2015
Knowing the difference between an employee and an independent contractor – and correctly classifying their workers within these categories – can help employers avoid costly fines and audits from the IRS or the Department of Labor. The federal and State governments have made a priority of cracking down on employers that improperly classify workers as independent contractors instead of employees, whether due to an honest mistake or in a misguided attempt to avoid payroll taxes.
In September 2011, the IRS launched a program to allow many employers, including non-profits, to resolve past worker classification issues and come back into compliance by making a minimal payment covering past payroll tax obligations. The IRS made some adjustments to the program in December 2012.
To be eligible for the Voluntary Classification Settlement Program an applicant must:
Full details are available on the Voluntary Classification Settlement Program Tax Page of IRS.gov and in Announcement 2012-45.
For more information about classifying workers properly visit:
Note about New Jersey’s independent contractor test: New Jersey law lays out a 3-pronged test (found at N.J.S.A. 43:21-19(i)(6)) to determine whether workers are employees or independent contractors. Known as the “ABC Test,” it provides that a worker is an employee unless:
a) The worker has been and will continue to be free from control or direction over the performance of services for the nonprofit;
b) The worker provides services that are outside the usual course of business of the nonprofit; and
c) The worker customarily engages in an independently established trade or business, occupation or profession.
Source: John J. Sarno, Esq., ed., Hiring, Firing & Risk Management: Employment Law for New Jersey Nonprofits, 3rd edition, Center for Non-Profit Corporations, 2007.
*All Center for Non-Profits members are also members of the National Council of Nonprofits. Not a member yet? Join today to support our advocacy, legal and management assistance activities, and access cost-saving opportunities!
The content of this article is for general informational purposes and does not constitute legal advice or a legal opinion. For answers to specific questions concerning your situation, you should consult a knowledgeable attorney who can advise you regarding your particular circumstances.