Classifying Staff for Tax Purposes
When your foundation compensates someone for work, you must determine whether they are an employee or an independent contractor. The IRS provides guidance on this in Publication 15-A.
One key factor is control: If your foundation controls how and when the work is done, the person is likely an employee. If the individual controls their own schedule and methods, they may be a contractor. It’s important to base the classification on IRS guidelines, not on what is more convenient for the foundation. Misclassification can result in penalties.
If the person is classified as a contractor, the foundation does not withhold or pay employment taxes. Instead, the contractor is responsible for paying their own taxes. The foundation must issue a Form 1099-MISC by January 31 each year, with copies sent to the IRS and applicable state agencies.
Exempt vs. Nonexempt Employees
If you determine the person is an employee, the next step is to classify them as exempt or nonexempt under the Fair Labor Standards Act (FLSA).
- Exempt employees are typically salaried and hold executive, administrative, or professional roles. They are not eligible for overtime pay.
- Nonexempt employees may be salaried or hourly and must be paid overtime for hours worked beyond 40 in a week.
This classification must be based on job duties and compensation thresholds, not the foundation’s preference. For more details, visit the U.S. Department of Labor at www.dol.gov.
Disclaimer: While we pride ourselves on our advice, please realize Exponent Philanthropy is not a law or accounting firm. This information contained in this Q&A is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code. It is our advice that you seek independent counsel, for any tax, accounting or legal issues you may have, related to matters that are of a material concern to you or your organization.
Still have questions?
Members can access staff experts through our Q&A service by calling 202-580-6560, or post a question to the member community to hear form peers in the field.
Explore our Q&A archive