Employment Requirements for a Nonprofit Organization
If you will be paying wages to anyone, even yourself, you will need to comply with all of the employer reporting and withholding laws of both your state and the federal government. The following is a summary of many of the requirements.
Federal tax withholding. Social Security and income taxes must be withheld from employees' wages and deposited to an authorized bank quarterly, monthly, or more often, depending on the amount. The initial step is to obtain a Form W-4 from each employee upon hiring. (This same form can also be used to fulfill the new hire reporting law discussed above.)
State withholding. In states that have income taxes, there is usually a withholding and reporting requirement similar to the federal one.
Local withholding. In cities that have income taxes, there is usually a withholding and reporting requirement similar to the federal one.
Unemployment compensation. Employers must pay taxes on employee wages to the state and federal governments regularly. Also, employers must submit reports both quarterly and annually.
Workers' compensation. Depending on the number of employees and the type of work, the state may require that the employer obtain workers' compensation insurance.
There are many instances when you may need to hire people to help you get things accomplished. If you plan on hiring employees, be aware that there are numerous governmental laws and regulations to comply with, and failure to do so can result in financial penalties. For example, if someone does not have the legal right to work in this country, you can be fined for hiring him or her.
For these reasons, you should thoroughly check the background of anyone you hire. An Application for Employment can be used to get references and other information from a candidate. While former employers may be afraid to say anything negative about a person, a glowing review can work well in the applicant's favor.
To check an applicant's background, you can use an authorization to release employment information, verification of education, and verification of licensure. These forms are signed by the applicant, and grant you permission to obtain the information you need. A written authorization to obtain a background check can be used to check on employees for any type of job.
Employer Identification Number
If you hire someone for more than a few hours work, you are required to register with the state and federal government to withhold taxes. Before you hire someone, you must obtain an employer identification number using IRS Form 55-4. Once you hire someone, you must have them complete IRS Form W-4 in order to calculate his or her withholding of income taxes.
Most states have their own registration and reporting requirements. Contact your state department of revenue for forms and applications.
Withholding, Social Security, and Medicare Taxes
If you need basic information on business tax returns, the IRS publishes a rather large booklet that answers most questions and is available online. You should also consult with a tax professional about your specific circumstances.
Independent contractor is a legal term for a person who works for you but is not your employee. You pay him or her to do a job, but he or she is an independent business that takes care of his or her own taxes and insurance.
You cannot just avoid all employment laws by calling your workers independent contractors. There are rules and regulations detailing when a person is or is not an independent contractor. The most important rule is that workers cannot be independent contractors if you control how and when they do their work. If you just hire them to do a job and let them do it in their way at their time, then they can be considered independent contractors. However, if you supervise, give them the tools to use, and tell them when to show up, they will most likely be considered employees.
A list of factors to be considered follows. A yes answer to all or most of the following questions will likely mean that the person hired is an independent contractor rather than an employee. For more certainty, use IRS Form 55-8.
- Does the person hired exercise independent control over the details of the work, such as the methods used to complete the job?
- Is the person hired in a business different from that of the person hiring? (For example, a plumber is hired by a lawyer.)
- Does the person hired work as a specialist without supervision by the person hiring?
- Does the person hired supply his or her own tools?
- Is the person hired for only a short period of time rather than consistently over a relatively long period?
- Does the job require a relatively high degree of skill?
- Is the person paid by the job rather than by the hour?
Contracts with independent contractors do not have to be in writing; however, having these in writing is often very important. For one thing, an employment contract in writing is an opportunity to state clearly that you intend it to be an independent contractor arrangement.
Also, since by definition you have relatively little control over the way an independent contractor does the work, the writing may be your last chance to influence important matters, like exactly what the job is and when it must be completed.
Note: It is often tempting to use the word employer in these contracts; however, it is not appropriate since the independent contractor is not employed (and you do not want the IRS thinking otherwise).
Form 1099 Miscellaneous
If you pay at least $600 to a person other than an employee (such as an independent contractor), you are required to file a Form 1099-MISC for that person. Along with the 1099s, you must file a Form 1096, which is a summary sheet of all the 1099s you issued.
Many people are not aware of this law and fail to file these forms, but they are required for such things as services, royalties, rents, awards, and prizes that you pay to individuals (but not corporations). The rules for this are quite complicated, so you should either obtain Package 1099 from the IRS or consult an accountant.
Unemployment Compensation Tax
You must pay federal unemployment taxes if you paid wages of $1,500 in any quarter, or if you had at least one employee for twenty calendar weeks. You can learn more about this topic at the IRS website.