Classifying staff
Your foundation must classify every person who receives compensation as an employee or a contractor. The IRS has guidelines (in publication 15-A) to help you classify your new employee. If determined to be a contractor, the employer does not collect or pay any employment taxes. It’s important to understand that the foundation is responsible for making a reasonable determination based on the IRS guidelines, not based on whether the foundation wants to collect and pay taxes. Although your foundation should review IRS guidelines, one rule of thumb is whether the foundation or the compensated person controls when and how they complete the work. If the foundation makes these decisions, the compensated person is an employee.
Exempt vs. nonexempt employees
If you’ve classified the compensated person as an employee, you must next classify that person as exempt or nonexempt. Exempt employees are generally in salaried managerial positions, and you don’t pay them overtime. Nonexempt employees tend to be in support positions, and you must pay them overtime, although they may be salaried or paid hourly. As with the employee versus contractor decision, the foundation cannot make this decision based on what it prefers but must abide by facts and circumstances described in the Fair Labor Standards Act. More information on the FLSA is available from the U.S. Department of Labor at www.dol.gov.
If you’ve determined that your staff person is a contractor, your foundation must provide them with a form 1099-MISC by January 31 of each year, with copies sent to the U.S. Social Security Administration (SSA). The contractor is responsible for paying any taxes on the income directly to the IRS and state agencies.
Learn what else you must do for employment-related taxes for employees >>
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