Employees Versus Independent Contractors

One of the most common employment mistakes that churches make is misunderstanding the difference between an employee and an independent contractor.

Each employee should receive a Form W2 from the church each year. Employees are subject to a wide array of employment laws and tax requirements.  On the other hand, each independent contractor who is paid $600 or more by the church in any calendar year should receive a Form 1099 from the church. Less stringent rules apply to a church for its independent contractors.

A church may prefer using contractors for some roles for several reasons. First, it may save the church money. The church will not have to pay employee benefits to its contractors, or supply office space or other equipment. The church will not have to pay the employer portion of Social Security or Medicare taxes. It will not have to pay into a state unemployment system for a contractor. Work comp insurance coverage is not required. The church can also avoid the complexity of income tax withholdings with contractors. For this reason, churches often prefer the “contractor” designation.

However,  it is vitally important for a church to make the proper determination as to which workers must be treated as employees, and therefore may not be treated as contractors.  Churches often assume that workers such as interns, musicians, and custodians are able to be treated as independent contractors.  This assumption is especially common when it comes to ministry interns. Often the church reasons that if a worker is part-time, temporary, and has relatively low responsibility within the organization, then it is appropriate to treat that worker as an independent contractor.  However, the IRS does not look to issues such as number of hours worked, temporary versus permanent status, or the level of responsibility of a worker in order to determine whether a worker is an employee. This can leave both the worker and the church exposed to tax issues and employment law issues.

If any paid worker reports to the church office or worship location, is under the instruction of another employee as an overseer, paid hourly or salary, performs work at the church’s facilities with church equipment, and can be terminated by the church, then the chances are high that the IRS would consider such a worker to be an employee, not an independent contractor. For example, a church’s intern who is supervised by a staff member who works at the church office and uses the church’s office equipment should almost always be properly treated as an employee, not a contractor.

Sometimes churches attempt to circumvent the rules by producing a written contract with a worker intending to demonstrate that the worker is, therefore, a contractor. However, the IRS does not consider the existence of such a document to be outcome determinative. The factors discussed above will still be applied to decide whether the worker is acting as an employee or a contractor regardless of the language in the written document.

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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.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com