Q: Could our ministry owe taxes or workers' compensation benefits in connection with independent contractors? 

A: The simple answer is "it is possible."

Three separate legal categories help to determine a ministry’s liability in relation to the work of independent contractors:

• Tax Requirements

  • For tax purposes, the IRS has developed tests for distinguishing independent contractors from employees. State revenue agencies generally use the IRS tests, as well. The IRS distinction applies to every worker—from the handyman who performs routine maintenance, to the administrative assistant who folds bulletins and supports the church staff, to a teenager who mows the lawn. Failing to properly determine an individual’s worker status can result in significant penalties at both the state and federal levels.

• Employee or Independent Contractor Status

  • Liability for negligence and other wrongful acts often depends on whether the individual who caused the harm was an employee or an independent contractor. Often, courts make this distinction based on prior case law and state statutes. A ministry could be held responsible for misclassifying a worker as an independent contractor when the worker was actually an employee. Also, a ministry could be found liable for negligently selecting a particular contractor or for providing faulty equipment for the contractor’s use, even if the relationship between the ministry and the worker is truly an independent contractor arrangement.

• Workers’ Compensation Requirements

  • State workers’ compensation laws are generally very flexible in applying coverage for injured workers. Even if your ministry classified the worker as an independent contractor, some states may apply the ministry's coverage if the circumstances provide that the worker should be considered an employee eligible for workers’ compensation benefits. For example, if a plumber is subcontracted to work on a building project for the ministry and neither the subcontractor nor the general contractor have workers’ compensation insurance that covers the plumber, the state will likely apply the ministry’s workers’ compensation policy to the plumber for any injuries he sustains on the ministry’s job site. In the absence of any other coverage, it’s also possible that the ministry’s workers’ compensation policy would cover teenagers providing lawn care for hire or maintenance workers employed on an as-needed basis.

Any agreement with an independent contractor should require that the independent contractor agree to identify the ministry for his or her own liability and provide a certificate of liability insurance. 

Determining Worker Status

The determination of independent contractor status is not always easy and may not absolve the ministry from all liability. It’s always best to consult with a locally licensed attorney when entering arrangements with independent contractors.

If there is still confusion about a worker’s tax status after meeting with an attorney, it may be helpful to take the case to the IRS using Form SS-8. However, be aware that an IRS ruling applies for tax purposes only, and not necessarily for liability or workers’ compensation purposes.

Any agreement with an independent contractor should require that the independent contractor agree to indemnify the ministry for his or her own liability and provide a certificate of liability insurance, demonstrating what coverages apply to the independent contractor’s activities. This sample agreement from Brotherhood Mutual can help your ministry and a locally licensed attorney get started.

Recommended Resources

If you found this information helpful, you might be interested in these other resources from Brotherhood Mutual:

• For more details about tax issues relating to independent contractors, refer to How can our ministry identify independent contractors for tax purposes?
• For additional information about ministry/independent contractor relationships, refer to How might our ministry be liable for the acts of an independent contractor?
• For more information about workers' compensation requirements relating to independent contractors, refer to Does our ministry's workers' compensation policy cover independent contractors?
• The Internal Revenue Service also offers a helpful Tax Guide for Churches and Religious Organizations.

*Important information: Brotherhood Mutual is pleased to provide Legal Assist as a complimentary resource. The services we offer through Legal Assist are intended to provide general legal information to our current and prospective policyholders.

The information we provide is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. Accordingly, no attorney/client relationship is created through this process, and no legal advice will be provided. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.