Independent contractors can give nonprofits access to specialized skills and expertise without adding permanent staff. From graphic designers and consultants to IT professionals and other specialists, contractors can be a valuable resource when organizations need support for specific projects. However, classifying a worker as an independent contractor comes with important responsibilities. Understanding how contractors differ from employees—and how much control your organization can exercise over their work—is essential to maintaining the proper relationship and avoiding potential tax consequences.
Understanding the differences
The most important first step to working with independent contractors is to understand how they differ from your employees. An independent contractor is an individual who performs services or work for your firm but also may perform similar services elsewhere. They are not employees of your nonprofit, and you are not responsible for paying their Social Security or Medicare taxes. The IRS has strict guidelines about what constitutes an independent contractor relationship and when it crosses the line into an employer–employee relationship.
Independent contractors must be truly independent
According to the IRS, independent contractors must remain completely independent from supervision on their projects. In other words, the nonprofit organization paying them for services can dictate the results, but they can’t dictate how, when, or where the work is performed, as is the case with a supervisor overseeing an employee.
As an example, consider a nonprofit that hires a graphic designer to create a flyer template and advertisements for upcoming community events. The nonprofit and designer discuss the project’s goals, agree on the materials to be delivered by Friday, and set a price for the work. The nonprofit specifies what it wants and when the finished work is due, but it does not control how, when, or where the designer completes the project. The designer can choose her own work hours, location, and process. This independence is an important distinction. The nonprofit is directing the result of the work, rather than supervising the way the work is performed.
The key differentiator between an independent contractor and an employee is control. If the employer has the legal right to control all of the details of how the services are to be performed, the relationship may have crossed the line into an employment relationship.
Benefits of working with independent contractors
Working with independent contractors is desirable for many nonprofits. They can focus their day-to-day operations on their mission while other experts and professionals are paid for their time and talents to provide much needed services. Generally, the IRS expects organizations to look at the entirety of the business relationship to determine whether a worker is an independent contractor. The description of what constitutes an employee and an independent worker has some gray areas, and the IRS expects organizations to police themselves on this matter. If the IRS thinks you are abusing the situation, however, and hiring independent contractors to avoid hiring employees and paying the expected taxes, you may owe back taxes and Social Security and Medicare payments.
Final thoughts
Independent contractors can be a practical and cost-effective way for nonprofits to access expertise while keeping their teams focused on the organization’s mission, but the arrangement must reflect genuine independence, not simply carry the independent-contractor label. Before engaging a contractor, consider the entire working relationship—especially the level of control your organization has over how the work is performed. Taking the time to classify workers correctly can help your nonprofit benefit from outside expertise while reducing the risk of unexpected taxes, penalties, and compliance issues.
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