Intern Compliance: What Nonprofits Need to Know

Nonprofits often rely on interns to support their missions. These arrangements can often be mutually beneficial– they provide meaningful learning opportunities for the interns and, in turn, the interns help organizations expand their capacity. It is extremely important, however, that internship opportunities are structured carefully so that they remain compliant with employment laws.

A common misconception is that simply being a nonprofit—or labeling a payment as a “stipend”—automatically makes an internship legally compliant. Unfortunately, that is not the case. Organizations that do not structure internships correctly may face issues related to worker classification, tax obligations, and even unemployment claims.

Understanding the rules around unpaid internships and stipends can help organizations avoid costly mistakes while still creating valuable experiences for emerging professionals.

When Can an Internship Be Unpaid?

Under federal wage and hour guidance, an individual may only be classified as an unpaid intern if the internship meets the Department of Labor’s Primary Beneficiary Test. This test evaluates whether the intern—or the organization—is the primary beneficiary of the relationship.

Several factors are typically considered, including:

• A clear, mutual understanding that there is no expectation of pay

• The internship provides training similar to what would be given in an educational environment

• The internship is connected to the intern’s formal education, such as academic credit, faculty supervision, or related coursework

• The schedule aligns with the academic calendar

• The intern does not displace paid employees or perform core operational duties

• Both parties understand the internship does not guarantee a paid job at the end

• The experience complements the intern’s education, rather than primarily serving the organization’s operational needs

If an intern is performing essential work that the organization depends on, the position is more likely to be considered employment rather than an educational internship. In those cases, the individual should generally be classified and paid as an employee.

The Truth About “Stipends”

Many organizations provide stipends to interns with the intention of supporting them financially. However, the way a stipend is structured matters significantly.

Stipends should generally be limited to reimbursement for actual, documented out-of-pocket expenses, such as mileage, transportation, or required supplies. When a stipend is tied to time worked, responsibilities performed, or completion of a set number of hours, it is typically considered taxable compensation and the individual should be classified as a W-2 employee, not an intern.

Could an Intern be Classified as a 1099 Contractor?

Some organizations consider issuing a 1099 form instead of hiring interns as employees. However, independent contractor classification also has very strict requirements, and an intern must meet specific requirements.

To qualify as a 1099 contractor, the individual must operate as a bona fide independent business, which generally means they:

• Provide services to multiple clients

• Control how and when the work is performed

• Offer specialized or expert services

• Operate with significant independence from the organization

In most nonprofit settings, interns rarely meet this standard– especially when they are students or individuals early in their careers who are gaining experience under supervision.

Misclassifying interns as independent contractors can create significant compliance risks related to taxes, wage laws, and unemployment insurance.

Building Compliant Internship Programs

Internship programs can be incredibly valuable for both organizations and participants when structured thoughtfully. To stay compliant, nonprofits and small businesses should focus on:

• Ensuring the internship is educational and training-focused

• Avoiding assigning interns core operational duties

• Ensure internships do not displace or replace paid staff

• Documenting expectations and the educational purpose of the program

• Properly classifying and paying interns when the role functions as employment

A well-designed internship program not only reduces legal risk but also provides a meaningful pathway for emerging professionals to learn, grow, and engage with your organization’s mission.

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Need help structuring a compliant internship program?

Cause Capacity can help ensure your organization supports interns effectively while meeting wage, tax, and classification requirements. Book a FREE Discovery Call today to learn more.