The Nonprofit FAQ

Should the executive director be a consultant?

Brad Becker (bradb1@ix.netcom.com) wrote to NONPROFIT on October 16, 1998: Having worked in Human Resources for many years, I'm fairly familiar with the distinctions between what constitutes an outside consultant, and what is considered to be an employee relationship. Nevertheless, I'm trying to see if any other groups have gone in the direction we might. Since I will be the first and currently only 'employee" of the organization, and since we are really small and cash conscious, I thought it would less expensive and easier for the organization to treat me as a Consulant (independent contractor) rather than an employee. That way the organization doesn't have to worry about payroll taxes and other withholdings. All they have to do is issue a 1099 at the end of the year. Anyone have experience of having the Executive Director technically not be an employee, but rather a consultant? Any and all thoughts would be really appreciated. There were two themes in the responses. One had to do with the effect on the organization and its leadership of following this course. Tony Poderis (tony@raise-funds.com), for example, wrote (in part): 1. The organization, being "really small and cash conscious," obviously must grow and build for the future---to make hard and maybe painful investments. That would mean for the board to commit to the raising of funds, to among other things, pay the stable and long-term salary of someone such as you. I doubt that, after several months or so in a consultant's role that you would be seriously regarded as an employee, a real member of the organization's family and with them for the long haul. And the consultant arrangement could easily be accepted as something tentative in the first place, thus inhibiting vision for the future of the organization. The board should not let this happen. 2. But, more to my concern, if I can be excused for making a possibly incorrect assumption. As the one and only paid staff, no doubt you will be expected to raise money personally as well. Take care that such an effort, in the consultant's role, will not have you be asked to, nor agree, to be paid according to a percentage of what is raised, or by commission or by bonus. That will mean trouble for you and for the organization. If that is the case--the temptation--please take the time to read an article of mine on the subject on my website at: http://www.raise-funds.com/898forum.html If point number 2 is not the case with your organization, excuse the assumption---but it usually does happen with a small and cash-strapped organizations who hire some types of consultants. And Carl Richardson (crafstman@cybertours.com), the Managing Director of the League of New Hampshire Craftsmen, added: I wonder how much you will save the organization by being a consultant. I assume that you still have an amount of money that you must earn to continue working for the organization. I also assume they are not paying great employee benefits. If you are not getting benefits now, you probably won't get less as a consultant. If you have only one employee, in some states, you can become exempt from unemployment/worker's comp. To add to the points that others have made, "consultant" carries connotations of being temporary. If you believe you will be with the organization awhile, you need to be seen as an integral part of the organization. Finally, boards of start-up organizations usually find they must eventually embrace the idea that their main job is to raise money. Because you are the only employee, it may seem to them (or to you) that they are raising money for your salary. For this reason, you may find it difficult to lead the charge toward prospective donors. Your relationship to your budget may begin to feel very personal. Do not let this happen. Your job is to help develop a shared vision of the organization. You next real task is to place keep that vision in the eyes of your board. They are raising money for programs to carry out that vision. If board members do not believe in the vision, they should not be on your board. If they do believe in the vision, they should support it with wealth, wisdom, and wallop. The other theme related to the rules by which the Internal Revenue service determines whether someone is an employee or an independent consultant. The IRS frowns on arrangements that lead to lower payroll costs for employers as a result of policies that classify too many people as contractors rather than employees. Channing Hillway, (channing@rain.org), for example, wrote: If you are only employed by the one organization, you may find that you will be regarded as an employee by the IRS and other agencies. To be an independent contractor, it's important to work for more than one organization. You'll also need to get a business license to demonstrate that you are a consultant rather than an employee, with bank account, post office box and etc. You'll get more responses to this question that may give you some more complete set of reasons. Nothing, sorry to say, is actually simple in this regard. Steer clear of the easy answers. Also, if you are going to serve as the exec, you may need to move the organization along to the next step so it can actually begin to pay you what you're worth. And Putnam Barber (pbarber@tess.org) added: You want to look at the IRS summary of how to answer this question, which you can find on the IRS website at http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html That page references IRS Publication 15-A that has a detailed explanations of the many related issues. The link to the longer publication is at the bottom of the page. I have heard of associations contracting with firms to provide "executive" services, including a contact person who will perform many of the roles of an Executive Director. I suspect such arrangements work well when there is a limited program of associational business and little else. I think the suggestion that anyone proposing to work on such terms would need to have a business license, etc., is likely to be correct. The expenses of running two parallel businesses (the NPO and the contractor) would probably be higher than the payroll and other taxes due in the NPO simply hires someone to be its exec. But that's a question that should be researched on a case-by-case basis. Posted December 5, 1998 - PB