Paying Contractors vs. Full-Time Employees

Paying Contractors vs. Full-Time Employees

As your organization grows, you may need to pay people to provide services, manage programs, or support your day-to-day operations. Depending on the nature of the work, you may pay someone as a vendor/independent contractor or hire them as an employee.

Understanding the difference is important because the classification affects how the individual is paid, what tax and documentation requirements apply, and what responsibilities your organization may have as an employer.

Vendor or Independent Contractor

A vendor or independent contractor is generally an individual or business that provides services to your organization but is not an employee. They are typically hired for a specific service, project, or area of expertise and generally operate independently from your organization.

Common examples include:

  • Graphic designers
  • Fundraising Consultants
  • Marketing Professionals 
  • Bookkeepers or Accountants
  • Website Developers
  • Event Vendors

When working with a contractor or vendor, your organization is generally paying for a service or deliverable, rather than employing the individual as part of your regular staff.

 

For Sponsees: Payments to vendors and independent contractors are submitted through Mazlo as payment requests.

To request payment, you will need to provide:

  • An invoice from the vendor or contractor.
  • A description of the services provided.
  • The amount being paid.

The invoice should clearly identify the vendor or contractor, describe the services provided, and show the amount owed. The service description should also make it clear how the expense relates to your organization’s charitable activities.

Before working with a contractor or vendor:

  • Confirm that the service supports your charitable purpose.
  • Confirm that sufficient project funds are available.
  • Agree on the scope of work and compensation.
  • Use a written contract or service agreement when appropriate. (You can save your agreements in Mazlo!)
  • Keep invoices, contracts, and other supporting documentation with your project records.
  • Make sure the individual or business is appropriately classified as a contractor rather than an employee.

Payment requests submitted without sufficient documentation may be delayed or may not be approved by the FSA team.

Full-Time or Part-Time Employees

An employee works for your organization on an ongoing basis and is generally subject to greater direction and control over how, when, and where their work is performed. Unlike a contractor, an employee becomes part of your organization’s regular workforce and is generally paid through a payroll system.

Employees may receive:

  • Regular Salaries or Hourly Wages
  • Payroll Tax Deductions and Withholdings
  • Paid Time Off
  • Health Insurance or Other Benefits

For Sponsees: Hiring and paying employees requires additional coordination with FSA because employee payroll involves payroll processing, tax withholding, and other employer responsibilities. Organizations paying full-time or part-time employees must first establish an external bank account separate from the business checking account with Mazlo (Midland States Bank).

The general process is:

  1. Your organization establishes its payroll process and runs payroll through its payroll provider.
  2. A payment request is submitted to FSA through Mazlo.
  3. The payment request includes the payroll invoice and a description of the payment.
  4. FSA disburses the approved funds to your organization’s external bank account.
  5. Your organization then distributes payroll funds to employees through its established payroll process.

FSA uses this process to maintain a clear separation between FSA’s role as fiscal sponsor and your organization’s role in managing its employees. FSA does not directly pay your employees for work performed on behalf of your organization.

Before hiring an employee:

  • Confirm that the position supports your charitable purpose.
  • Confirm that sufficient project funds are available for wages and related payroll costs.
  • Establish the appropriate employment and payroll arrangements.
  • Understand the costs associated with the employee, including applicable payroll taxes and benefits.

 

Do not classify someone as a contractor simply because it is easier or less expensive than hiring an employee. Misclassification can create tax and compliance issues for your organization.
If you are unsure how someone should be classified, consult a qualified tax or employment professional.