Should Our Nonprofit’s Executive Director be an Employee or an Independent Contractor?

1. The IRS will make its own assessment of whether a person is an employee or independent contractor of an organization based on the level of control the employer has over that hired person’s conduct and work. It is important for the organization to evaluate carefully before deciding how to treat the hired person. The board needs to make the right call because directors can be held personally liable for failure to pay payroll

taxes,
if the hired person is an employee as opposed to an independent contractor, who is responsible for his/her own employment taxes. (As a related note, the board should ensure they have general liability and D&O insurance in place.)

2. The board will also want to be able to demonstrate that it engaged in a reasonable hiring

process,
and that other candidates were considered for the position. This will help to eliminate the appearance of a conflict of interest for the new hire/former board member. (We should confirm they have a COI Policy in place.) This is especially true in the case of founding directors, who have a high level of personal investment and identification with the new nonprofit.

3. As always, it is best to have a solid job description in place before making a hire.

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From the Standards for Excellence®: An Ethics and Accountability Code for the Nonprofit Sector. The Standards for Excellence code, developed by the Standards for Excellence Institute, includes specific benchmarks and measures that provide a structured approach to building capacity, accountability, and sustainability in your nonprofit organization. The code identifies 6 major areas of nonprofit governance and management: Mission, Strategy, and Evaluation; Leadership: Board, Staff, and Volunteers; Legal Compliance and Ethics; Finance and Operations; Resource Development and Fundraising; and Public Awareness, Engagement

and
Advocacy.

The Standards for Excellence® Institute, a program of Maryland Nonprofits, provides the best possible resources to nonprofits nationwide, helping build their capacity to effectively and efficiently meet the needs of their communities. Members of Maryland Nonprofits gain access to an online community with an expansive library of resources and customizable templates. Membership with Maryland Nonprofits is designed to help you raise more money, develop your board, build relationships, learn, save on the things you need to run your organization, and amplify your voice in Annapolis. Join today.