Before a tax-exempt organization (EO) can determine how to treat payments for services rendered, the EO must first know the business relationship that exists between the organization and the person performing the services. The person performing the services may be--
In determining whether the person providing the service is a common law employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
It is critical that the EO, as the employer, correctly determine whether individuals providing services are employees or independent contractors. Generally, the EO must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The EO does not generally have to withhold or pay any taxes on payments to independent contractors.
Caution: An EO can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor. Also, see Paying Independent Contractors for information on reporting requirements for payments to independent contractors.
Refer to Who Are Employees? in Publication 15-A, Employer's Supplemental Tax Guide, for more information.
See Employment Tax Resources for Exempt Organizations, for more information.
Learn more about the benefits, limitations and expectations of tax-exempt organizations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop.