In this episode of the Nonprofit Jenni Show podcast, I talked about some inadvertent legal mistakes I've seen pop up in the nonprofit world lately. I asked Rachel Schaffer Lawson of Schaffer Law Firm to come back on the show and answer some questions about employee vs. contractor issues, legal requirements for fundraising, and programs which may not belong in your nonprofit organization.
Please note: I highly encourage you to listen to Episode 4 of Season 2 before reading this blog post! My blog lists some great “action items” for you to take after you listen to the podcast, plus additional resources you can check out if you have further questions. However, my podcast guests give so much additional rich information which isn’t included in the article you’re about the read.
Last season, I had Rachel come on the show to answer some questions I had been receiving about common legal issues nonprofit organizations face. Everyone loved the episode so much that I had to bring her on again to ask her about some other issues I've seen pop up lately. The first questions I wanted to ask were about the legal definition of an 'employee' and a 'contractor.' Nonprofits will often try to work with contractors as much as possible to avoid paying payroll taxes; however, if the IRS were ever to find out that one of these individuals was actually an employee, the nonprofit organization would have to pay back all the owed taxes from the time that employee started working there. Rachel said there are a few rules of thumb you can use to determine whether someone is an employee:
- They use equipment provided by the organization
- They have a dress code or uniform
- They work where, when, and how the organization dictates
One practice I've seen recently is a nonprofit trying to claim their Executive Director or CEO is a contractor. However, Rachel says it's difficult to classify an Executive Director as a contractor because they serve as the primary representative, and often as the public face, of the nonprofit organization. The Executive Director also has their daily job duties defined by the organization.
I've also seen many nonprofit organizations who believe their Development Director, or someone in charge of fundraising, is a contractor. While it is possible to have a fundraiser who is a contractor, there are a few considerations to keep in mind:
- If your fundraiser only fundraises for your organization and does not have other clients, they should most likely be classified as an employee.
- If your fundraiser does qualify as a contractor, they will need to file for a separate charitable solicitations permit with the state. They will also, most likely, have more reporting requirements than a nonprofit organization with fundraisers who are employees.
I also asked Rachel about the other requirements an organization must follow to solicit donations, especially if they have not received their 501c3 certification yet. She let me know that organizations who have filed their 1023 and received a letter from the IRS that their application is pending are able to get their charitable solicitations certification from the state. Once they have this certification, they can start soliciting donations.
Many pending nonprofits ask Rachel about how they can ask for donations if they can't offer tax deductions as a benefit to their donors. Rachel always reminds her clients that donations under $250 are not tax deductible anyway, so small donation amounts can be solicited easily. Donors who do meet and exceed that donation threshold will be able to receive their deductions once your organization is approved as a 501c3 organization.
The last topic I discussed with Rachel was the issue of stores, restaurants, and other revenue-generating programs which nonprofits try to classify as a part of their organization. Unfortunately, many of these programs do not qualify as not-for-profit revenue streams when they do not directly support the organization's mission. For example, if your organization is an animal shelter and sets up a thrift store, the thrift store isn't directly benefiting the animals you serve--it is indirectly benefiting your animals after you funnel the earnings to your real programs.
Here are some examples of not-for-profit revenue streams run by nonprofit organizations:
- Rachel has a client organization which is a nonprofit women's Bible study ministry, and they write and publish books which are sold to the members of the ministry as study materials for the group. They also sell the books to non-members of the ministry. These earnings do directly benefit the organization because the books are used as teaching materials for the organization's beneficiaries.
- The Cafe at Thistle Farms is a restaurant which brings in revenue for the Thistle Farms nonprofit organization. The employees of the cafe are beneficiaries of Thistle Farms, and they are directly benefited by the cafe because they receive job experience and training as they reintegrate into society.
Fortunately, it is completely acceptable for nonprofit organizations to have a for-profit social enterprise as an arm and revenue stream of their organization--they just need to classify these revenue streams as for-profit entities if they do not directly benefit their mission.
If you have questions about any of the topics discussed here, I highly recommend you visit Rachel's website, or give her a call! Rachel is the legal expert I always turn to with my nonprofit questions.
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