Most churches will issue a Form W-2 to a minister for their compensation if the minister is considered an employee of the church. The determination of whether a minister is an employee or an independent contractor is crucial in deciding whether to issue Form W-2 or Form 1099-NEC. Here are the detailed guidelines and criteria for determining the correct form to use, including relevant IRS regulations and rulings:

Determining Employee vs. Independent Contractor Status

1. Common Law Rules:

   • Behavioral Control: If the church has the right to direct and control how the minister performs their work, including the details of when, where, and how the work is done, the minister is likely an employee.
   • Financial Control: If the church controls the business aspects of the minister’s job, such as how the minister is paid, whether expenses are reimbursed, and who provides tools/supplies, the minister is likely an employee.
   • Type of Relationship: If there are written contracts or employee-type benefits (e.g., insurance, pension plans), and if the relationship is expected to continue indefinitely, the minister is likely an employee.

2. IRS Publication 15-A:

   • This publication provides detailed guidance on determining whether a worker is an employee or an independent contractor. It emphasizes the importance of the right to control the worker’s performance and the financial aspects of the worker’s job.

3. Revenue Ruling 87-41:

   • This ruling outlines 20 factors that indicate whether sufficient control is present to establish an employer-employee relationship. These factors include instructions, training, integration, services rendered personally, hiring, supervising, and paying assistants, continuing relationship, set hours of work, full-time required, doing work on employer’s premises, order or sequence set, oral or written reports, payment by hour/week/month, payment of business/traveling expenses, furnishing of tools/materials, significant investment, realization of profit or loss, working for more than one firm at a time, making services available to the general public, right to discharge, and right to terminate.

Issuing Form W-2

• Employee Ministers:
  • If the minister is determined to be an employee based on the above criteria, the church should issue Form W-2. This form reports wages, and other compensation paid to the employee
  • Compensation paid to a minister for performing services in the exercise of their ministry is not subject to FICA taxes but is subject to income tax reporting on Form W-2.

Issuing Form 1099-NEC

• Independent Contractor Ministers:
  • If the minister is determined to be an independent contractor, the church should issue Form 1099-NEC. This form is used to report payments made of at least $600 in the course of a trade or business to a person who is not an employee for services.
  • Payments to independent contractors are not subject to income tax withholding, and the contractor is responsible for paying self-employment taxes.

Special Considerations for Ministers

• Housing Allowance:
  • A minister’s housing allowance is excluded from gross income for income tax purposes but is included in net earnings for self-employment tax purposes. This allowance should be reported in box 14 of Form W-2 if the minister is an employee.

Conclusion

To determine whether to issue Form W-2 or Form 1099-NEC to a minister, the church must evaluate the nature of the relationship using the common law rules and IRS guidelines. If the minister is an employee, the church should issue Form W-2. If the minister is an independent contractor, the church should issue Form 1099-NEC.

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Clergy Financial Resources
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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Clergy Financial Resources
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