Independent Contractor Status in Nonprofit Organizations

Hiring independent contractors can seem like a smart way for nonprofits to cut costs. Contractors handle their own self-employment taxes, which means your organization avoids paying the employer share of payroll taxes. In addition, you save on benefits and reduce administrative overhead. However, misclassifying an employee as a contractor can lead to serious financial and legal consequences if the Department of Labor (DOL), IRS, or state agencies decide you got it wrong.

A Shifting Landscape

Worker classification rules have been in flux. When President Trump assumed office in January 2025, his DOL halted enforcement of the Biden-era guidelines under the Fair Labor Standards Act (FLSA). Those rules relied on a multifactor test that examined various “economic realities.”

The Trump administration is now crafting its own standard, expected to resemble its previous approach. That framework emphasized two key factors:

• The level of control the worker has over their tasks
• The worker’s ability to earn profit or incur loss

Courts, however, have consistently ruled that no single factor determines status.

Looking at the Big Picture

The FLSA doesn’t define “independent contractor.” Instead, the DOL looks to U.S. Supreme Court precedent, which stresses a totality of circumstances approach.

Key considerations include:

• How essential the worker’s services are to your mission
• The permanence of the relationship
• The degree of control your organization exercises

Other factors to consider include the worker’s investment in tools and equipment, their opportunity for profit or loss, and whether they operate as an independent business.

Additional elements may include where the work is performed (remote vs. on-site) and whether a formal contract exists. Keep in mind: states often impose stricter tests, and qualifying as a contractor under the FLSA doesn’t guarantee compliance with IRS or other federal standards.

Compliance and Consequences

If a worker is deemed an employee under the FLSA, you must comply with minimum wage, overtime, and related requirements. For tax purposes, employees trigger obligations like paying the employer share of Social Security and Medicare taxes, withholding income taxes, and managing payroll deductions.

Misclassification can be costly. Beyond back wages and taxes, nonprofits may face liability for unpaid benefits, workers’ compensation premiums, and even penalties.

Navigating the Challenge

With evolving definitions and overlapping regulations, determining worker status is complex. Nonprofits should review classification practices regularly and seek expert guidance when in doubt. The right approach can help you avoid compliance pitfalls and protect your organization’s resources.