When a church hires a worker, one of the initial decisions that must be made is whether to treat the worker as clergy, non-clergy employee or contractor. This decision may seem insignificant, but it has huge implications when it comes to payroll.

When you hire a new employee, you need to fill out paperwork to pay three different types of withholding taxes – federal, state, and FICA.

• Your new employee needs to complete Form W-4 (Employee’s Withholding Certificate), which asks them how much federal income tax to withhold from their pay. 
• Clergy are not subject to W-4 withholdings unless they elect optional withholdings.

The first step in hiring a contractor is getting their W-9 on file.  

Churches and businesses most commonly use IRS form W-9, Request for Taxpayer Identification Number and Certification, to get information from vendors they hire as independent contractors.

When a church or business pays an independent contractor $600 or more over the course of a tax year, it is required to report these payments to the IRS on an information return called form 1099-MISC. 

Churches or businesses that hire independent contractors do not withhold income tax or pay Medicare or Social Security taxes for their independent contractors, as they do for their employees; contractors are responsible for these obligations.

Many churches may have misclassified an employee as an independent contractor to save money. If you’re misclassified a worker as an independent contractor, your church could be subject to penalties. 

It isn’t always clear whether a worker is an employee or an independent contractor, but in general, the more control the church has over what workers do and how they do it ( job description, paid hourly or salaried, the frequency of service) the more likely it is that they are employees. 

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.

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