How Employee Misclassification Can Be Dangerous for Nonprofit Organizations

Everyone knows the difference between a full-time worker with benefits and some who is an independent contractor. However, these two things often get mixed up during the classification process, causing trouble and hassle in the future for many nonprofits.

Some people get paid to work at nonprofits. Many others volunteer. Some are essentially freelance workers or even interns. When you fail to pay attention to these details, you often end up with employee misclassification.

While it not might seem like a big deal, it’s something that can be incredibly detrimental to a nonprofit, especially if more than one person is misclassified. But can really that many people be misclassified? Unfortunately. And it happens every day. It’s an easy way for startup nonprofits to save money and take advantage of their volunteers.

But maybe you’re a new nonprofit organization owner that wants to know more about the topic of misclassifying employees and the dangers behind them. There are punishments and fines behind mistreating your employees, so here’s what every nonprofit owner should know.

If you’re interested in protecting your business for the long-term and avoiding commercial insurance claims, this is what you need to know about why employee misclassification is never good, via the National Council of Nonprofits.

Why Employee Misclassification Needs More Attention From Nonprofits

Regular employees pay taxes and get benefits, while independent contractors have to supply their own. And volunteers get nothing, meaning they rely on the nonprofit to have insurance to protect them if something happens on their liability. So to misclassify them all can be a huge pain, to say the least; you can easily expect the Internal Revenue Service (IRS) to investigate if it gets serious.

But the biggest pull in employee misclassification is the fact that many nonprofits get away without paying their workers anything at all since so many get put down as volunteers. For example, an independent contractor doesn’t pay taxes throughout the year, meaning they pay at the end of the year with all their expenditures.

This also means they buy their own benefits. Which is why keeping track is crucial. You don’t want to be paying for benefits for someone that pays for their own. And you don’t want to get into it with the IRS. It’s imperative to know exactly who is an employee, a non-exempt employee (does not get overtime), a volunteer or a contractor.

So if you misclassify a regular full-time employee as a contractor, you’re going to owe fines, to say the least. And back pay. And overtime for that worker. Basically, whatever was held, they get back. And if you classified them as an independent contractor when they were a full-time employee, they’re now going to owe to the state. But it’s also your job to try and fix the problem.

Ways to Avoid this Disastrous Problem and Keep Your Nonprofit Running

There needs to be someone who acts like Human Resources, even if you can’t afford it on your own. Everyone needs to be kept track of for tax season. It makes it a lot easier. Here are some of the  fines you can face from the government for employee misclassification, according to Emplicity, an HR Outsourcing expert:

  • Expect a fine for each unfiled W-2 form.
  • Penalties of 1.5 percent wages, plus 40 percent of the FICA taxes not withheld, and interest accrued from when the money should’ve been deposited.
  • A penalty for failing to pay taxes equivalent to .5 percent of the unpaid tax liability for each month up to 25 percent of the total liability.
  • More fines and penalties, depending on the situation and how many involved. Expect at least a $1,000 fine per misclassified worker, the full amount of taxes not withheld, or prison time.
  • Always have a contract on hand detailing what exactly kind of work this individual is doing for your company and what worker classification they are. Contracts can be lifesavers, so don’t ever forget them.

About David G. Sayles Insurance Services

At David G. Sayles Insurance Services, we strive to protect the investments of business owners like you. Our comprehensive policies are customized for you to provide the exact coverage you need. For more information, contact us today at (800) 439-0292.