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Overview
Independent contractors are self-employed individuals hired by an employer to perform work under a contract. They are not considered employees and are therefore not subject to employment tax withholding or covered by most employment laws. However, there are legal criteria that define who can be classified as an independent contractor. Federal government agencies and some states have their own tests to determine independent contractor status.
Unsure if you should classify someone as a contractor? Use the ABC test and considerations below or contact contracts@movementstrategy.com for assistance. MSC Human Resources does not handle 1099 contractors.
Please note: Once a contract is in place, MSC requires an invoice submitted through the AP Form to make payment.
When you are determining a worker’s status, you need to consider your control over them. If you have great control over the worker, they are probably an employee. To help you examine control, you can use a three-part test from the IRS called common law rules. The three parts are explained below.
Behavioral control: Do you control or have the right to control what the worker does and how the worker does their job? If so, the worker might be an employee.
Financial control: Do you control the business aspects of the worker’s job? This includes things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies. If you control business aspects, then the worker might be an employee.
Type of relationship: Are there any written contracts or employee type benefits? These include things like retirement plans, insurance, and vacation and sick pay. Will your relationship with the worker continue? Is the work performed a key aspect of your business? If you answered yes to these things, then the worker might be an employee.
You must consider all three parts of the test. One factor doesn’t weigh more than the others. Also, there is not a set number of factors that a worker needs to meet to be considered an employee. For example, a worker might only meet two parts of the test and still be classified as a common law employee. We have to use our best judgment.
Here is the definition of an employee: Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Other Considerations
First Consider Hiring as an Employee: The simplest option is to hire individuals as employees rather than independent contractors, because there are a lot less legal restrictions for hiring someone as an employee. Employment status also simplifies the annual tax return filing process. There are many options for hiring employees:
Regular full-time: Works regularly over 40 hours/week and receives full benefits, including paid time off and medical/dental/vision.
Regular part-time: Works regularly at least 20 hours/week and receives most benefits at a pro-rated rate, including paid time off and medical/dental/vision.
Temporary: Does not regularly work at least 20 hour/week. No benefits are offered. California sick leave is offered to CA based employees.
If Considering a Contractor Option, Evaluate by these Criteria: These criteria should be considered in combination. Meeting one criterion alone will not make an individual an independent contractor.
Scope of Work: Is the scope of work critical to the core functions of your organization? For example, is the individual being hired to perform administrative, operations, and/or program management tasks? If so, it is likely that this person should be hired as an employee..
Duration of Contract: Is the scope of work you are considering longer in duration than 3-6 months? Then it is quite likely this person should be an employee, instead of a contractor.
Is the work full-time?: If this person will be dedicating an average of 40 hours/wk to the work, then it is very likely this person should be an employee.
History: Does this individual have a history of consulting for similar work or do they have their own consulting business? Does this person have a business license for the work they will perform? If so, the person is likely a contractor.
Multiple Clients: Does this person offer their services to the general public, and have other clients besides MSC? If so, this person is likely a contractor.
Exceptions to the ABC test: There are a number of occupations that are not subject to the ABC test. Not all of these exceptions are easy to understand. If you believe you may be dealing with such an exception, please contact contracts@movementstrategy.org. MSC will help you determine if the worker or the entity should be classified as an independent contractor. Here are a few of those exceptions:
Business-to-Business Contracting Relationships: If you are thinking about entering into a contract with a business service provider, to qualify for this exception, the business service provider must be a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (this includes nonprofit organizations). If this business service provider satisfies 12 additional criteria, then the “Borello test” (which involves analyzing a multitude of factors) must be applied to determine whether the business service provider is an employee or an independent contractor.
Professional Services Contracts: For certain professional services contracts involving marketing, human resources administration, travel agents, graphic design, grant writers, fine artists, still photographers/photojournalists, freelance writers, and editors, the Borello test applies after a number of initial requirements are satisfied.
White Collar Occupations: For the white collar occupations noted below, the Borello test applies instead of the ABC test.
Licensed insurance agents and brokers
Licensed attorneys, architects, engineers, private investigators and accountants
Registered securities broker-dealers or investment advisers or their agents and representatives
Consequences of Misclassification: When you misclassify an individual as a 1099 contractor, there is a potential for owed back wages, payroll taxes and penalties levied to the employer (fiscally sponsored projects and MSC), among other fines and penalties.
Hiring a US Based Contractor Process
Hiring a US Based Contractor Process
Step 1: Determine Classification
Use the above information to determine whether you should classify a worker as an independent contractor or as an employee. If the worker is an employee, visit the HR page for new hire instructions.
Step 2: Gather the required documents below.
Step 3: Use the Accounts Payable Form to generate an independent contractor agreement.
Step 4: To pay your contractor, submit an invoice via the Accounts Payable Form.
Hiring a Fundraising Contractor Process
Hiring a Fundraising Contractor Process
A fundraising counsel is a type of professional fundraiser. A fundraising counsel can be a person, corporation, or unincorporated association who is hired by a charity to plan, manage, advise, counsel, consult, or prepare materials to solicit donations for charitable purposes. Unlike the commercial fundraiser, a fundraising counsel does not solicit donations from the public, and does not receive or exercise any control over the solicited funds or property. Instead, the donations go directly to the charity.
Step 1: Determine Classification
Use the above information to determine whether you should classify a worker as an independent contractor or as an employee. If the worker is an employee, visit the HR page for new hire instructions.
Step 2: Know the Contractor Requirements
By law, the California Attorney General oversees the activities of fundraising counsel. A fundraising counsel that operates in California must do all of the following:
File Form CT-3CF to register with the Attorney General's Registry of Charities and Fundraisers before working with a charity.
Pay the registration fee.
Renew registration each year.
File Form CT-11CF – Notice of Intent to Provide Services Related to Charitable Solicitation 10 days before starting any service for a charitable organization.
Comply with the contract requirements set by California law.
File a report each year on a form provided by the Registry of Charities and Fundraisers listing the charities for whom the fundraising counsel provided services and certifying that the fundraising counsel has a written contract with each charity that complies with the legal requirements.
To enter into a contract with an organization or individual who will provide fundraising services, MSC must receive proof of the individual or entities' registration with the California Attorney General or an explanation as to why the contractor is not required to register.
Penalties for charities entering into fundraising counsel contracts with unregistered individuals or entities can be severe.
Step 3: Use the Accounts Payable Form to generate an independent contractor agreement.
Step 4: The potential contractor will recieve an email requesting that they complete a registration confirmation form. This form confirms the contractor's registration requirements per California law.
Step 5: To pay your contractor, submit an invoice via the Accounts Payable Form.
Resources
The Independent Contractor Checklist can be a useful resource on determining whether someone is an independent contractor or not.
The Liability Acknowledgement Form is required if you are working with an individual or entity whose total contract work is under $10,000 or fewer than 6 months in duration.
Managed Service Agreements and Work Orders
Managed Service Agreements and Work Orders
In some cases, a project may wish to engage with a contractor on behalf of others (such as fellows, grantees, etc). A managed service agreement (MSA) allows the project to engage with a contractor for variable bodies of work. The project can then use work orders to specific specific deliverables, pay rates, etc.
Step 1: Use the MSA Template to generate a managed service agreement.
Step 2: Email the completed MSA to contracts@movementstrategy.org. MSC's Contract team will review and execute the MSA.
Step 3: When you are ready to work with the contractor under the MSA, use the Work Order Template to generate a work order.
Step 4: As the contractor completes work, they will send invoices. To pay your contractor, submit the invoice via the Accounts Payable Form.
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