Hi,
Most nonprofits pay instructors, coaches, cleaners, and “consultants” on a 1099 because it’s cheaper and simpler. But if the IRS or DOL decides those people were really employees you owe years of back taxes, back overtime, and penalties on every single one.
The trap is that the 1099 form doesn’t decide anything. The working relationship does. If any of this sounds like your organization, you likely have workers who are misclassified:
- You pay program staff, instructors, or admins on a 1099, but you set their hours and tell them how the work gets done
- You call someone a “consultant” who works only for you, uses your space and equipment, and has been there for years
- You give volunteers stipends or “honoraria” for work you actually depend on
- You assumed being a nonprofit – or the worker preferring a 1099 – makes it fine
Here is how the exposure actually stacks up:
- Get it wrong and you owe the employer payroll taxes, the employee’s withholding, plus penalties and interest, typically going back three years or more
- It’s two hits at once – the IRS for the taxes, and the Department of Labor for unpaid minimum wage and overtime under the FLSA, enforced separately
- Willful cases lose the reduced rates and add per-worker fines and personal liability for officers – the same unremitted payroll taxes that can land on a board member personally
- It usually surfaces at the worst time: one worker files for unemployment or workers’ comp, the state investigates, and the whole roster gets reviewed
Here is the part most firms don’t tell you: there is a clean way out, but only before an audit finds you. The IRS Voluntary Classification Settlement Program lets an eligible nonprofit reclassify workers going forward and settle the entire back exposure for roughly 10% of a single year’s employment tax – with no interest, no penalties, and no audit of prior years. The catch is that you lose eligibility the moment you are already under audit, so the window is now, not later.
That is exactly what we handle: we run each role through the real IRS and state tests, document a defensible position for the ones that are fine, and for the ones that aren’t, use the voluntary program to cap the back exposure before an unemployment claim or an audit does it for you at full price.
Reply to this email by Friday and we will set up a free 15-minute call with one of our senior nonprofit specialists. Bring a list of everyone you pay on a 1099, and we will flag which ones are most likely to get reclassified – and what it would cost you if the IRS gets there first. Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com