Performing arts organizations wrestle with this question frequently, or they just try to get away with hiring people as contractors and unfortunately may be putting themselves at risk for consequences from the IRS, and even jeopardy of their non-profit status. BTW, if the IRS finds you in breach of the rules, they can go back through historic years and require you to pay back taxes on those you formerly labeled as contractors as well! A scary prospect...
Forbes Article: IRS Inspector Urges Crackdown on Mislabeling 'Independent Contractors'
Hiring someone as a contractor is certainly infinitely simpler and cheaper for the organization, as you don't have to handle payroll details such as taxes, social security, unemployment, etc. You just issue them a 1099 at the end of the year, and that's only if they earn over a certain level. But the IRS is very particular about who can be considered for this arrangement, based on the work they are doing for you, and how that arrangement is managed.
Quicken Article: IRS Cracking Down on Misclassified Employees
There's some simple litmus tests to guide you to know if the person you're hiring should be considered an Employee vs a Contractor:
When Is A Worker Considered A Contractor?
When Is A Worker Considered An Employee?
For most performing arts organizations hiring actors, crew members, musicians, the first 3 qualifications for Contractor seem to be met. It's the fourth detail that gets sticky. When you're working on a performance project, the rehearsals are very much scheduled and required times for the people to be present, prepared, and to work with the others of the team. This is the area the IRS has been getting more and more particular about in terms of arts groups hiring contractors, and is likely why I would recommend that you move to an employment model sooner rather than later. I've heard of many theatres and other groups being forced by the IRS to change their hiring status of these individuals due to this rule. They are definitely cracking down.
Thompson Greenspon Article: Independent Contractor vs Employee: Worker Classification Matters
Some organizations have moved from calling their payment a "stipend" or "fee" to calling it a "travel reimbursement" instead, in the hopes of avoiding the employee status, but that's fudging the system at best. Consider carefully how you handle these details. Better to be completely legal in the eyes of the IRS as they become stricter with non-profit organizations, and avoid them looking into the details of your organization even more deeply due to this detail. When in doubt, consult an lawyer or accountant knowledgeable in this area.
Spike, as his friends call him, has 30 years in the performing arts world as an actor, director, administrator, marketer, fundraiser. He has consulted with numerous theatres and other performing arts organizations and loves to help such groups and individual artists to achieve their success!