Employee, contractor or volunteer? Getting it right

This guide is for small charities that are starting to pay people for the first time: a part-time coordinator, a bookkeeper, a graphic designer, someone to run a summer program. It is also for charities that want to "give something back" to hard-working volunteers. Getting these relationships right protects both the charity and the people who work for it. After reading, you will understand the difference between an employee, an independent contractor and a volunteer, the risks of getting it wrong, and when to ask for help.

Three different relationships

• Employee: someone who works for you, and whose work you can direct and control. You pay wages, withhold taxes, and follow employment laws such as minimum wage and overtime rules.
• Independent contractor: someone in business for themselves who provides a service to you, like a freelance designer or an accounting firm. They control how they do the work, usually have other clients, and handle their own taxes.
• Volunteer: someone who gives their time freely for a charitable purpose, without pay and without expecting pay.

The label you choose doesn't decide which one a person is. The facts of the relationship do. Calling someone a "contractor" or asking them to sign a contractor agreement doesn't make them one.

How the IRS looks at it

The IRS uses what are called common-law rules. The key question is how much right you have to direct and control the work. The IRS groups the evidence into three categories:

1. Behavioral control: Do you control, or have the right to control, what the worker does and how they do it? (Setting hours, giving detailed instructions, training them in your methods.)
2. Financial control: Do you control the business side of the job? (How they are paid, whether expenses are reimbursed, who provides tools and supplies.)
3. Type of relationship: Is there a written contract or employee-type benefits, such as insurance or paid vacation? Is the relationship expected to continue? Is the work a key part of what your organization does?

The IRS says there is no magic number of factors. You look at the whole relationship and write down how you reached your decision.

If you are still unsure, either the charity or the worker can file IRS Form SS-8 to ask the IRS to decide. The IRS says it may take at least six months to get an answer.

How the Department of Labor looks at it

The U.S. Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA), the federal law on minimum wage and overtime. It uses a different test, called the economic reality test. The basic question is: is this worker economically dependent on you for work, or truly in business for themselves?

DOL's Fact Sheet 13 says that being paid on a 1099 form, or signing a contractor agreement, doesn't by itself make someone an independent contractor.

The DOL's approach has been changing. Its pages say a 2024 rule is the subject of litigation, point to a May 2025 bulletin on its current enforcement position, and note that the department proposed a new rule in February 2026. Check the DOL's misclassification page for where things stand when you read this.

Your state may also have its own tests for employment, unemployment insurance and workers' compensation, and they can be stricter than federal rules. Check with your state labor department.

Why misclassification is risky

Misclassification means treating someone as an independent contractor when they are legally an employee. It can be costly:

• The IRS says that if you classify an employee as a contractor without a reasonable basis, you may be held liable for employment taxes for that worker.
• The DOL says misclassified employees may miss out on minimum wage, overtime and other protections, which you may have to pay back.
• You may face state penalties, unemployment insurance claims, and workers' compensation problems if someone is hurt.
• The worker loses protections they were entitled to.

Small charities often slip into misclassification with good intentions, for example paying a trusted volunteer a flat monthly amount "to keep things simple."

Volunteers can't be paid wages

What this means in practice:

• Reimbursing real expenses (with receipts) is different from paying for time. Keep good records.
• "Stipends" need care. A regular payment to a volunteer, especially one tied to hours worked, can look like wages. Before you offer any stipend, gift card program or regular payment to volunteers, get advice from an employment lawyer or accountant who knows nonprofits.
• Don't turn an employee into a volunteer for extra hours doing the same job.
• Thank volunteers in non-cash ways that aren't tied to hours: recognition, training, a small celebration.

Getting it right in practice

When you are about to pay someone:

1. Describe the work. Who decides how, when and where it is done? Is it ongoing or a defined project?
2. Apply the IRS and DOL questions and write down your reasoning.
3. For contractors: use a written agreement that describes a defined project or service, and confirm they run their own business (other clients, own tools, set their own methods). Collect IRS Form W-9 and find out your information-return filing duties.
4. For employees: set up payroll properly. A payroll service can handle tax withholding and filings. Check your state's rules on workers' compensation and unemployment insurance.
5. Review once a year. A contractor relationship can drift into employment as the work grows.

Your classification checklist

• List everyone you pay, and what you pay them for
• For each, review the IRS's three categories and the DOL's economic reality question
• Write down your reasoning and keep it on file
• Use written agreements for contractors that describe a defined service
• Set up payroll for anyone who is an employee
• Stop any regular payments to volunteers until you get advice
• Check your state's employment rules
• Review all paid relationships once a year

Getting classification right is one of the kindest things you can do for the people who work with you. When in doubt, treat the person as an employee or ask a professional.

If you want to talk it through with someone who has done it, ask a member charity for help through the Exchange.

General information, not legal, tax or financial advice. Rules change and every situation is different, so check the official sources and talk to a qualified professional before you act.