We receive lots of questions throughout the year and particularly around tax reporting time about whether individuals providing services to churches for payment – musicians, maintenance staff, janitorial staff, landscapers, etc. – should be considered employees or contractors. The Internal Revenue Service has guidance to help you determine how to classify those individuals based on several factors including:
1 – Is there behavioral control? Do you have the right to direct or control how the worker does the work? If so, s/he may be an employee and not a contractor.
2 – Is there financial control? Do you have the right to direct or control the business part of the work? If the worker has a significant investment in the work or has an opportunity to have a profit or loss from the job, s/he may be a contractor.
3 – What is the relationship of the parties? Do you pay benefits to the worker? If so, s/he may be an employee. Is there an actual written contract? If not, s/he may be an employee.
These factors matter because you withhold taxes and report income differently depending on the classification. In very broad terms, when s/he is an employee, you must report income on a W-2 and withhold and pay Social Security and Medicare taxes (these taxes do not apply to your clergy – only laity). If s/he is a contractor, you report income on a Form 1099 and do not withhold or pay Social Security and Medicare taxes. If you are unsure of how to classify someone, check with your tax accountant and refer to IRS Publication 1779 for assistance in making that determination. Not classifying individuals properly could lead to problems down the road if you are audited and deemed responsible for any taxes that are determined should have been paid in previous years (plus interest and penalties, of course).
The IRS is currently offering a program named the Voluntary Classification Settlement Program (VCSP) to provide an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. Since employment taxes can be significant, this partial relief could make a big difference in what would be owed to correct the tax treatment of workers.
We encourage you to take a close look at the treatment of those receiving payment for services by your church and make sure they are classified appropriately while this program is active. We know that the IRS has begun to take a closer look at governmental agencies and other non-profits with regard to how they are classifying workers. We do not know for certain but think it is reasonable to expect a closer look at religious organizations in the future – particularly following a period offering forgiveness for past incorrect classifications. Please call or email us if we can assist you with evaluating your worker classifications.
Christine