What’s the Difference
and Why It Matters
Paula Goedert, Partner,
Barnes & Thornburg LLP,
You need someone to perform a service;
They don’t want to be a W- 2 employee.
They just want cash or a check, but no
withholdings. It’s so easy to say yes and
what’s the harm?
The Fraud Triangle
Contact: Mark C. McClain, Marketing
Director, Calibre CPA Group,
Over the years, there has been extensive
research into the causes of corporate
fraud. One theory is the “fraud triangle,”
where all sides of a triangle — motive,
opportunity and rationalization — must
exist for fraud to occur. Since motive
and rationalization are unique to each
fraudster, the opportunity “side” must be
addressed by establishing sound internal
A nonprofit can be required to pay
employment taxes for an individual if the
IRS later determines that he/she should
have been treated as an employee rather
than an independent contractor. This
includes all taxes that the employer was
required to withhold or pay from its own
State Unemployment Tax
State unemployment tax authorities
are notorious for determining that individuals should have been classified as
employees rather than independent contractors. Making the wrong choice can
cost the nonprofit back taxes and penalties.
Including an individual as an employee
on a workers compensation insurance
schedule permits the employer to turn
over a claim for workplace injury to the
insurance company for settlement. If the
controls to reduce opportunity risk.
person is not included as an employee,
the insurance company will not accept
Independent contractors may later
feel they should have been treated as
employees and included in health insurance and benefit plans. A surviving
spouse sometimes is the party to make
Have a Good Contract
If a nonprofit is treating an individual as
an independent contractor rather than
an employee, it is essential to have a
tightly drafted independent contractor
agreement in place. Even a well-drafted
agreement, however, is not a bullet-proof
defense. Each case should be examined
on its particular facts to determine how
governmental authorities and the courts
would view the merits.
Another element when designing
internal controls is segregation of duties.
Poor segregation occurs when one person receives mail, enters checks into
the organization’s systems, makes the
deposit and prepares the bank reconciliation. This individual could commit fraud
with little concern about being caught.
By inserting another employee into this
process, such as having someone else
prepare bank reconciliations, the opportunity for fraud is reduced.
When an adequate segregation of
duties exists, no single employee controls a transaction cycle from beginning
to end. While achieving proper segregation can be difficult for small nonprofits
or organizations with reduced staff, it is
critical to have adequate segregation of
duties as even the best internal controls
can be circumvented.