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Staffing Changes Due to COVID-19? Tips for Classifying Workers and Avoiding Employment Tax for Volunteers


The COVID-19 pandemic has turned businesses upside down, and the nonprofit sector has not been spared. Many nonprofits may be re-evaluating and modifying their workforces as a result of the pandemic. Although some nonprofits may be expanding operations after having received new interest from funders or volunteers, far more nonprofits have been experiencing financial difficulty and, as a result, have been forced to downsize their staffs.[1] In fact, the results of a survey released in May 2020 revealed that nonprofits had laid off or furloughed 18% of staff.[2] For example, the YMCA has been particularly affected by the pandemic; as of July 2020, 70-95% of YMCA affiliates’ workers had been furloughed.[3] To compensate for having smaller staffs, some organizations may be seeking more help from volunteers. When making any changes to the staff, it is important that an organization carefully consider the obligations and limitations it may have because of its relationship with a worker. When hiring a worker, a nonprofit should consider whether the United States Internal Revenue Service (IRS) would deem the worker to be an employee or independent contractor and treat the worker accordingly. Further, when agreeing to accept help from volunteers, it is important that a nonprofit organization observe certain restrictions so as not to jeopardize the volunteering relationship.

 Although state and federal governments use a variety of tests to classify a worker, the majority of agencies and courts use either the economic realities test or the right to control test.[4] For example, when reviewing claims under the Fair Labor Standards Act, courts will use the economic realities test to determine how a worker should be classified.[5] The IRS, on the other hand, uses the right of control test, which is the focus of this article.[6] In addition to presenting the IRS’s method of classification and related restrictions and consequences to help nonprofit organizations properly understand their obligations, this article also briefly presents opportunities to request that the IRS classify a worker and to request relief in conjunction with a reasonable misclassification or voluntary reclassification. Finally, this article highlights considerations for working with volunteers, including volunteers who are also current employees.

 A.     Classification of Employees and Independent Contractors

 Because an organization has fewer obligations with respect to hiring an independent contractor versus hiring an employee (e.g., if the worker is not an employee, then the organization does not have to pay unemployment taxes or withhold several different taxes from wages [7][8]), organizations oftentimes prefer to hire a worker as an independent contractor rather than an employee. But merely calling a worker an independent contractor will not satisfy the IRS. Rather, the IRS will consider the nature of the relationship between the worker and the organization to determine whether the worker functions as an employee or an independent contractor. An organization can call a worker anything it wants, but if the worker meets the IRS’s criteria to be considered an employee, then the organization is subject to employment taxes for the worker. Therefore, it is important for an organization to carefully consider how the IRS would likely classify the worker.

 

“Tax,” 401(K) (2013). Licensed under CC BY-SA 2.0.

 The IRS considers several factors when classifying a worker. The IRS determines whether a worker is an employee or independent contractor by evaluating how much independence the worker has while working and how much control the organization exercises over the worker.[9] In determining the level of independence and control, the IRS considers:

           1.     the relationship between the organization and the worker,

           2.     the behavioral control (e.g., the amount of training provided and how much direction has                         been provided about how to work), and

           3.     financial control (e.g., reimbursement for expenses, exclusive rendering of services, that the                   organization can exercise over the worker.[10]

 When evaluating the relationship between the organization and the worker, the IRS may consider the relationship as evidenced by contracts, any benefits that the organization provides to the worker, how central the worker’s role is to the organization’s work, among other factors. Because the IRS considers several factors, it may not always be clear how a worker should be classified. The next section presents some ways that the IRS aims to reduce uncertainty or mitigate against the consequences of the uncertainty. 

    B.    Request for IRS Classification; Opportunities for Relief and Voluntary Reclassification

           1.     Requesting the IRS to Classify (Form SS-8)

Because it is not always obvious how a worker should be classified, the IRS allows an organization to request that the IRS provide a classification. If an organization is unsure of how a worker should be classified, then it can file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to receive a determination from the IRS.[11]

           2.     Section 530 Relief

If the IRS deems that an organization should have classified a worker as an employee, but the organization has a reasonable explanation for not doing so (e.g., reliance on a relevant court case), then the organization may not have to pay employment taxes for the worker.[12] In addition to showing a “reasonable basis”, the organization must also show that it reported about the worker in a consistent manner and that all workers in similar positions were treated similarly.[13]

           3.     Voluntary Classification Settlement Program

The IRS also incentivizes organizations to correct misclassifications through the Voluntary Classification Settlement Program.[14] Through this program, the IRS provides some relief from employment taxes for organizations that correct misclassification of a worker.[15]

      C.  Avoiding Employment Tax When Working with Volunteers

 In addition to being careful about worker classification, nonprofit organizations should be careful not to mistakenly jeopardize the relationship between the organization and the volunteer. In particular, the organization should not compensate the volunteer with anything that could be considered wages, especially cash; some non-cash benefits might not raise concern if they are small and infrequently given.[16] Because volunteers provide help for free, any compensation to a volunteer could potentially create an employer-employee relationship.[17]

Finally, an organization should be careful about how it treats an employee that decides to volunteer for the organization. An employee of a nonprofit is prohibited from volunteering to perform a function that is performed as part of the employee’s regular employment.[18]


By Claire Grace

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