For tax purposes, all U.S. employers are required to place their workers into one of four categories:
Generally, a ministry does not have to withhold or pay taxes on payments to independent contractors. However, an incorrect classification could leave a ministry vulnerable to paying back taxes, large fines, and other penalties later, if the worker is later determined to be an employee.
The key to assessing a worker’s status is the relationship between the business and the worker. In order to determine if a worker is an employee or independent contractor, the Internal Revenue Service looks at many factors, including:
For details on the identifying characteristics of each of these factors, see this article from Brotherhood Mutual.
Typically, no single factor makes the determination, and relevant factors in one situation may not apply in another. The Department of Labor has outlined several factors that should be considered. This checklist from Brotherhood Mutual can help your ministry make the determination. Make sure you document all factors used in making this determination for workers in your ministry.
Authorities are keeping a closer eye on employers than ever before, and the U.S. Department of Labor and the Internal Revenue Service are now working with more than two dozen state governments to identify organizations that violate classification laws. As a result of this partnership in Connecticut, the IRS assessed approximately $50 million in taxes because of misclassified and undocumented workers from 2009-2012.1
There are several ways to obtain help if your ministry is unsure of how to classify a worker. For help understanding how the law applies in your situation, check the common-law rules in IRS Publication 15-A. If you need more specific advice, contact a licensed attorney in your area. An employment lawyer will know the applicable local laws and should be able to tell whether your ministry is in compliance.
Finally, if there is still confusion over a worker’s tax status, you can take your case directly to the IRS by completing Form SS-8. The IRS will make a determination on the worker’s status based on the facts you present on the form.
If your ministry determines it has misclassified a worker, consider the Voluntary Classification Settlement Program (VCSP). VCSP is an optional program that provides eligible organizations the opportunity to reclassify workers as employees.
Some benefits of VCSP include:
To participate in this voluntary program, exempt organizations must meet certain eligibility requirements — apply by filing Form 8952.
The IRS’s determination deals with tax status only. It does not apply to liability or workers’ compensation issues. One way to limit a ministry’s liability is to require the independent contractor to indemnify the ministry for his or her own liability. The contractor also should provide a certificate of liability insurance, demonstrating what coverages apply to the independent contractor’s activities.
The vast majority of church workers, including ministers, have an employer-employee relationship with their churches. However, one example of an independent contractor could be a traveling evangelist who is paid for his services by a number of churches. If a church pays him at least $600 in a year and the evangelist qualifies as an independent contractor for tax purposes, the church should issue self-employment tax forms (IRS Form 1099 MISC and Transmittal Form 1096). If you make the determination that services will be supplied to your ministry by an independent contractor, this sample Independent Contractor Agreement can help your ministry and a locally licensed attorney get started.
Classifying workers can be a complex task, and should involve consultation with a locally licensed attorney or ministry tax professional. By using these available resources, you can help make sure your ministry complies with the law and continues working toward its mission.
1Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, National Employment Law Project, August 2014.
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