1099-NEC from non-profit organization for that work does not fit IRS definition of independent contractor

[MDBostonMA]

Hello TT tax experts,

My daughter does administrative operations work for a non-profit organization that is not yet tax-exempt (though has plans to get this status). Her work is directed by the organization's executive director, with whom she meets weekly to get direction on both what she does and how.  She performs some duties, on her own as that process has been established with the exec director's input, e.g. paying invoices.  She is paid hourly, which vary from week to week.  

She received a 1099-NEC, which invokes the self-employment tax.  However, to my read, she does not meet the IRS criteria for an independent contractor (see below). Apparently, the non-profit organization is not set up with structure for employees and does not pay social security and medicare taxes.

>>>> Does my daughter owe the self-employment tax despite not meeting the definition of an independent contract simply because she works for a non-profit?

>>>> Should I dispute the NEC (independent contractor) classification by filing IRS form SS-8?

She's raised the issue with her boss, the Exec Director, and the accounting firm but it won't be resolved before 4/15.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined. "You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed."

Thank you!!

[MindyB]

It sounds like she does meet the definition of an employee.  You'll need to dispute the classification, otherwise you'll be responsible for the FICA taxes, which isn't correct.

When you enter the 1099-NEC, choose "Income that should've been reported on a W-2." 

Make sure you send Form SS-8 to the IRS either before or on the day you file your return. 

[MDBostonMA]

Thank you Mindy B.  Do you know if working for a non-profit somehow changes the rules, i.e. my daughter clearly does not fit the definition of a independent contractor and is more like an employee ... however,  I wonder if because she's paid by a non-profit organization that does not pay FICA, she would owe self-employment tax regardless of not meeting the definition of an independent contractor?

[RobertB4444]

The IRS definitely allows non-profits more leeway with paying contractors/employees than they do for-profit enterprises.  Here is the language the IRS uses for the three tests for an employee-

U.S. Internal Revenue Service: The IRS primarily focuses on control and independence in the working relationship between an organization and the contractor. The IRS uses a three-factor test (Behavioral Control, Financial Control, and Relationship) to determine whether an individual is an independent contractor or an employee. The Behavioral Control prong examines the extent of control the hiring party has over what the work is and how the work is performed. The Financial Control prong assesses the extent of financial investment and risk taken by the worker as opposed to the organization. This can include how the worker is paid, how expenses are reimbursed and what tools/supplies the worker utilizes. The Relationship prong examines the nature and type of relationship between the parties, specifically with respect to benefits. The more control an organization exercises, the more likely the IRS is going to classify the worker as an employee rather than an independent contractor. Further information can be obtained from the IRS Website.

You said earlier that your daughter met with her supervisor once a week to receive direction.  That could be viewed as her being pretty self directed.  The IRs tends to lean heavily in the direction of "you are an employee" but it is not completely cut and dry.

On the upside for your daughter she can deduct expenses against her income, which is not the case for W2 employees.  If she is doing a lot of this work from home then she has some very basic expenses that the TurboTax system will walk you through entering so that you can reduce her taxable income.

@MDBostonMA