Q. Can churches classify paid workers
as independent contractors to avoid
paying FICA or withholding income
taxes from them?
A. No. Churches cannot classify paid workers
as independent contractors in an effort to
save money. They must follow the law.
For a non-clergy employee, the church generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and deposit the taxes with the government in a timely manner.
The church must also pay its own share of FICA taxes for the employee. These taxes can be significant. For 2019, the employer’s FICA share is equal to 7.65% of earnings up to $132,900 and 1.45% of earnings exceeding that amount.
In contrast, if the worker is an independent contractor, the church does not withhold federal income or FICA taxes — nor need to pay any FICA or federal unemployment taxes on the worker’s earnings.
Because churches have financial incentives for characterizing employees as independent contractors, the IRS has the authority to impose heavy penalties for misclassifications. Churches can be held liable for employment taxes for misclassified workers, and additional penalties may apply.
To determine whether a worker is an independent contractor or an employee, the IRS examines the degree of control and independence in three broad categories — behavioral, financial, and type of relationship. No single piece of evidence —such as, for example, a written agreement expressly stating that the worker is an independent contractor — will control the determination.
A church that is unsure about the proper classification can ask the IRS for a determination. Though these decisions may take six months or longer, a church that continually hires the same types of workers may want to consider filing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
A church is required to obtain a taxpayer identification number (TIN) from any contractor who receives $600 or more in payments. A Form W-9 facilitates obtaining this information, and in certain situations, you may be required to request the TIN with a Form W-9. Contractors that refuse to provide a TIN are subject to backup withholding, and your church can be penalized for not withholding the required amount.
On Form W-9, the contractor identifies the type of organization and provides the legal name and matching TIN. It is a good idea to have this form on file as proof that you sent information to the IRS as it was provided to you by the contractor. Also, since you are not required to file a Form 1099-MISC for payments to corporations, this form provides proof that you were told the contractor was a corporation.
Do you have questions related to employee classification?
Clergy Financial Resources can help. Visit our website at https://www.clergytaxnet.com/resources/proadvisor/ today to schedule a Pro Advisor meeting.
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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