Can a Nonprofit Hire Independent Contractors, and Who Decides?

Yes. A nonprofit can hire independent contractors, and most do. What a nonprofit cannot do is decide which one a worker is. Classification follows the facts of the working relationship, chiefly how much control the organization has over how the work is done, and a contract calling somebody a contractor does not settle it. Exempt status makes no difference here: the rules that apply to a charity are the rules that apply to a business.

Contractors are how a large part of the sector actually operates. Across 256,539 charities filing a full Form 990, 140,919 (54.9%) filed at least one 1099, the median filer sending 9 of them. More striking, 30,985 (12.1%) file 1099s and report no employees at all. The figures below are from the IRS annual extract of those returns, and the analysis script is published with the method.

The test that decides it

The IRS applies a common law test built on control, grouped into three kinds of evidence. No single answer decides the question, and no fixed number of factors has to point one way.

• Behavioural control. Does the organization direct how, when and where the work is done? Set hours, required methods, supervision and training all point to employment. A contractor is engaged for a result and decides the route to it.
• Financial control. Who supplies the tools, who carries the risk of a loss, is the worker free to offer the same service to others, and are they paid a regular wage or by the job? Someone with their own clients, their own equipment and an invoice is a contractor.
• Type of relationship. Is the engagement open ended or for a defined project? Are benefits provided? Is the work the organization’s core activity? Written contracts matter least here, and they are the thing most organizations rely on most.

If the answer is genuinely unclear, either party can ask the IRS to decide by filing Form SS-8. It is worth knowing that the determination takes months and that the filing itself tells the IRS there is a question, so it is a step for a real dispute rather than a routine check.

The state test is stricter, and it is the one that catches charities

Several states apply an ABC test to their own employment, wage and unemployment laws, and it starts from the opposite presumption: a worker is an employee unless the hiring organization proves all three of A, B and C. California’s version, which came in with Assembly Bill 5, is the strictest. Part B is the one that bites: the work has to be outside the usual course of the hiring entity’s business.

A tutoring charity engaging tutors as contractors fails part B, because tutoring is exactly what the organization does, however independent those tutors are in practice. A charity of any kind engaging a plumber passes it easily. There is no charitable exemption from these tests. An organization can be correctly treating somebody as a contractor for federal tax and incorrectly for state law at the same time, which is why a state unemployment claim from a former contractor is the most common way the question gets tested.

Which roles are usually which

The pattern across real organizations is fairly consistent:

Two traps sit either side of that table. A stipend paid to somebody doing directed work is wages, whatever it is called, and volunteers who receive more than genuine expense reimbursement can become employees by accident. And paying a board member for services is not forbidden, but it is a related party transaction that belongs in the minutes and under a conflict of interest policy, decided without that person in the room. The board guide covers how that vote should work.

How many charities use contractors

Form 990 asks two questions that make this measurable: Part V line 1a, the number of forms transmitted with Form 1096, which is the count of 1099s the organization issued, and line 2a, the number of W-2 employees.

Four groups, and the split is not what the sector’s language about staff implies. 42.9% of charities have both employees and contractors. 17.9% have employees and no 1099s at all. 12.1% have contractors and no employees. And 27.2% have neither, which is the all volunteer organization that buys nothing from anyone as an individual.

At the other end, 31,626 charities (12.3%) report at least one contractor paid more than $100,000, a median of 3 each, and that is the figure that climbs hardest with size: 0.6% under $250,000 against 85.4% over $25m. Large organizations do not use contractors instead of staff, they use both, and the contracts are substantial.

The contractor only organizations are not all tiny. Their median spending is $318,480, and 66.8% of them report no payroll spending anywhere on the return, which confirms the W-2 count rather than relying on it. Outside fees are a median 7.6% of their total spending, rising to 51.0% at the 90th percentile: at the top of that range the organization is essentially a budget with a set of contracts attached.

What the outside spend looks like against payroll

Part IX separates payroll, lines 5 to 10, from fees paid to outsiders for services, lines 11a to 11g: management, legal, accounting, lobbying, professional fundraising, investment management and everything else. Comparing them gives the share of the people budget that leaves the organization.

Among the 180,674 charities that have a payroll at all, outside fees are a median 8.3% of payroll plus outside fees, 21.3% at the 75th percentile and 43.0% at the 90th. Measured against total spending rather than people cost, outside fees are a median 3.4%. The ratio is flat across the size bands, between 7.5% and 8.7%, until it rises to 12.8% over $25m, where management and investment fees start to appear. The rest of the cost structure is in the overhead benchmarks, and headcount and pay in the salary benchmarks.

Two limits on reading this as a contractor budget. Line 1a counts 1099s of every kind, including rent and prizes, so it is not a headcount of contractors. And a charity whose staff are paid through a professional employer organization or a fiscal sponsor reports no employees while having people, which inflates the no payroll share. Both cut the same way: treat these as measures of how much money goes to people outside the payroll, not as a census of freelancers.

When the fundraiser is a contractor

One risk gets worse with contractors and almost nobody budgets for it. A contract fundraiser or grant writer holds the relationship context: which donor asked to be approached after the school year, who gave in memory of whom, what was promised on a call last March. When an employee leaves, some of that is in the organization’s systems and in colleagues’ heads. When a contractor’s engagement ends, it leaves in their inbox, and the organization often has no practical claim on it.

Two things reduce it, and the first is free. The engagement letter should state that donor data and work product belong to the organization, that correspondence with donors runs through an organizational email address, and that records are handed over when the work ends. The second is having the context somewhere other than one person’s notes. For a development team carrying many donor relationships, Gratefully assembles that history from the CRM, documents and email and produces handover notes when a relationship changes hands, at $4,788 a year for five seats, with a free plan for one person. It is the wrong purchase for an organization with a few dozen donors and one contract grant writer, where the clause in the contract and a shared drive do the entire job, and it does nothing about classification, payroll or filing.

The paperwork, in order

• Before the first payment, collect a W-9. Not after, not at year end. It gives the legal name, the taxpayer identification number and the entity type that decide whether a 1099 is needed at all. The W-9 guide covers the form from the other side, when somebody asks the charity for one.
• Issue Form 1099-NEC at $600. One is needed for each unincorporated person or business paid $600 or more for services in the calendar year, by 31 January to both the recipient and the IRS. Payments to corporations are generally exempt, with legal fees a notable exception. Who gets a 1099 sets out the rules and the exceptions.
• Ten returns means electronic filing. Since tax year 2023 an organization filing 10 or more information returns in total, counting W-2s and 1099s together, has to file them electronically. Half the charities that file any 1099 send 9 or fewer, so this threshold sits almost exactly at the sector’s median and catches organizations that have never needed a filing service before.
• No TIN means backup withholding. If a contractor does not provide a correct taxpayer identification number, the payer must withhold at 24% and remit it. That is the practical reason the W-9 comes first: it is far easier to get than to explain a 24% deduction to somebody who has already done the work.
• Check the state. Many states require their own copy of the 1099, on their own deadline, and some require registration before the first contractor payment.

What getting it wrong costs

Reclassification is retrospective. An organization found to have treated employees as contractors owes the income tax it should have withheld, both halves of Social Security and Medicare, federal and state unemployment tax, and penalties and interest on all of it, usually for every year still open. State wage law claims can follow for overtime, meal breaks and expenses, and those are not always covered by insurance.

Relief exists and it is narrower than people assume. Section 530 of the Revenue Act of 1978 can protect an employer that had a reasonable basis for treating workers as contractors, treated all similar workers the same way, and filed the required 1099s consistently. Miss the 1099s and the relief goes with them, which is the practical argument for filing them even when the classification itself is uncertain.

The realistic risk for a small charity is not an IRS audit. It is a contractor who stops working, files for unemployment benefit, and gets a state agency asking why no contributions were ever paid on their earnings. That one claim examines every similar engagement. Budget the difference honestly before choosing: an employee costs roughly 8% to 10% more than the wage in payroll taxes alone, before benefits, and the budget template has a line for it.

Two things in this data that are wrong, and worth saying

Self reported counts are messy at the extremes, and pretending otherwise would misrepresent the source.

The first is at the top of the form count. A 1099-NEC is required at $600, so an organization cannot have issued more forms than its total spending divided by $600. 451 returns (0.32% of those reporting any form) fail that test, and they fail it spectacularly: the largest reports 989,558 forms against $3.2 million of spending, which is a dollar amount typed into a box that asks for a count. Resolving the EINs through the ProPublica Nonprofit Explorer confirms it: they are a foster family agency, an animal rescue and a family services nonprofit, none of which issued a million forms. Screened out, the largest genuine filers are exactly who you would expect, led by Southern New Hampshire University at 256,866. All figures on this page use the screened set.

The second is the dip at the top of the filing rate. 86.1% of charities over $25m file a 1099, slightly below the 87.0% of those at $5m to $25m, which no story about size explains. Looking at the 1,542 large charities reporting no forms at all, 95.2% of them report paying outside fees and 86.8% report payroll. They are paying outsiders and leaving line 1a blank. So the dip is a reporting gap, not a behavioural one, and the true rate at the top is higher than the table shows.

Deciding it, once

A short sequence settles most cases and leaves a record if anyone asks:

• Write down the three control questions and the answers for this specific role, before the engagement starts. A paragraph in a file is the evidence a reasonable basis existed.
• Test it against the state’s rule too, especially part B: is this work outside what the organization normally does?
• If it is core, recurring and directed, hire an employee. Payroll for one person through a service is a modest monthly cost and cheaper than one reclassification.
• Collect the W-9 first, file the 1099 second, and treat both as non negotiable even where the classification is arguable.
• Review annually. Contractor engagements drift into employment quietly, usually by adding hours and supervision one month at a time. The annual calendar is the place to check it.

Method and limits

The data is the IRS SOI annual extract for processing year 2024, restricted to 501(c)(3) organizations with at least $25,000 of total expenses, which gives 256,539 returns. The 1099 count is Part V line 1a, the number of forms reported on Form 1096. Employees are Part V line 2a, a W-2 count. Contractors over $100,000 are Part VII section B line 2, employees over $100,000 Part VII section A line 2. Payroll is Part IX lines 5 to 10 and outside fees lines 11a to 11g. Sizes are total functional expenses, Part IX line 25.

Five limits. Organizations filing Form 990-EZ or 990-N are absent, so the smallest band is not “small charities” in general. Line 1a counts every kind of 1099, not only payments to contractors. Line 2a counts W-2 employees, so staff employed through a professional employer organization or a fiscal sponsor appear as none. 451 returns fail the plausibility screen described above and are excluded from the form counts. And nothing here is legal advice: classification turns on facts a page cannot see, and the cost of getting it wrong is high enough to be worth an hour of an employment adviser’s time.

Questions people ask

Can a nonprofit hire independent contractors?

Yes, and most do: 54.9% of charities filing a full Form 990 file at least one 1099. What the organization cannot do is choose the classification. It follows the facts of the relationship, mainly how much control the charity has over how the work is done.

What is the difference between an employee and a contractor at a nonprofit?

Control. An employee works hours the organization sets, under its direction, usually on its core activity and with its tools. A contractor is engaged for a result, decides how to reach it, generally serves other clients and carries the risk of a loss.

Can a nonprofit run entirely on contractors?

Some do. 30,985 charities (12.1%) file 1099s and report no employees at all, with a median spending of $318,480, and two thirds of them report no payroll spending anywhere on the return. It works when no role is continuous and directed.

Does a nonprofit have to issue a 1099?

Yes, for each unincorporated person or business paid $600 or more for services in a calendar year, on Form 1099-NEC by 31 January. Payments to corporations are generally exempt, with legal fees a notable exception.

Is a stipend a way to avoid employment?

No. A payment for directed work is wages whatever it is called, and a volunteer who receives more than real expense reimbursement can become an employee by accident. The label has no effect on the classification.

Can a nonprofit pay a board member as a contractor?

It is allowed but it is a related party transaction. It belongs in the minutes, under a conflict of interest policy, decided without that person present, at a rate the organization can show is reasonable.

What happens if a nonprofit misclassifies a worker?

It owes the tax that should have been withheld, both halves of Social Security and Medicare, unemployment tax, and penalties and interest, usually for every open year. State wage claims can follow. Section 530 relief requires that the 1099s were filed.

Where do these figures come from?

The IRS Statistics of Income annual extract of Form 990 returns, processing year 2024, covering 256,539 charities with at least $25,000 of spending. It is a free public download, and the analysis script is published alongside the method.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.