Q: Paying a contactor working as-needed for a non-profit?
We are non-profit in California and currently the organization is fully volunteer run. We are considering hiring a contractor for website maintenance and updates for 2-8 hours a month (only if needed). Can we pay the contractor by check when work is required? OR do we need an agreement in place and also declare the payments to IRS and the CA Franchise State Board?
A:
Even if you are hiring an independent contractor for occasional work, it's important to follow proper procedures to ensure compliance with state and federal regulations. Here's what you should consider:
1. Written Agreement: It's advisable to have a written independent contractor agreement in place that outlines the scope of work, payment terms, and the contractor's status as an independent entity. This helps establish the nature of the working relationship.
2. IRS Form W-9: You should have the contractor complete and submit IRS Form W-9, which provides their name, address, and Taxpayer Identification Number (TIN) or Social Security Number (SSN).
3. Reporting Payments: If you pay the contractor $600 or more during a calendar year, you must report these payments to the IRS and the contractor using Form 1099-NEC (Nonemployee Compensation). This form is filed with the IRS and a copy is provided to the contractor by January 31 of the following year.
4. California Franchise Tax Board (FTB): California requires businesses to report independent contractor payments of $600 or more annually to the FTB. You can do this electronically through the FTB's website.
5. AB 5 Compliance: Ensure that your working relationship with the contractor is properly classified under California Assembly Bill 5 (AB 5) rules, which went into effect on January 1, 2020. AB 5 requires many workers to be classified as employees unless they meet specific criteria for independent contractor status.
To ensure full compliance, it's best to consult with a tax professional or attorney familiar with California non-profit and employment laws. They can guide you on the specific steps needed for your situation and help you set up the proper agreements and reporting procedures.
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