Employee vs. Independent Contractor-US

Comments (7)

Many churches rely on paid staff to manage various aspects of ministry, from performing music during worship services to administering outreach programs.  Are these paid staff church employees or independent contractors?  It is important to identify each paid staff person as either an employee or an independent contractor in order to ensure compliance with tax reporting and labor laws.  IRS Publication 15-A (Employer’s Supplemental Tax Guide) provides some common law rules that examine the relationship of the worker and business (church) through the prism of behavioral control, financial control and type of relationship.  Employees, in contrast to Independent Contractors, are subject to more process controls (how the work is done).

Characteristics of Employees

  • Paid hourly or salary
  • Provided more restrictions as to when and / or where to work
  • Provided with training and performance feedback
  • Provided with employee benefits (paid sick time, paid vacation time, pension, etc.)
  • Use tools and equipment supplied by the employer

Characteristics of Independent Contractors

  • Paid a fixed fee per service rendered
  • Has flexibility as to when and where to work
  • Has flexibility to decline a particular engagement and / or has the freedom to find a substitute
  • Has the freedom to seek out opportunities to do similar work for other churches
  • Manage their own training
  • Has greater financial risk
  • Written service agreements

With this said, it is not always clear how to classify a paid staff person.  Here is an example to consider relating to paid church musicians…

My church’s worship coordinator assigns songs for a service in consultation with the worship committee.  From a preapproved listing, pianists and organists are recruited and paid a fixed fee for each worship service they perform.  These musicians have the freedom to decline an offer or recruit a substitute from the preapproved listing if there is a scheduling conflict with a particular service.  Preparation time varies greatly from service to service due to a number of variables including whether or not the musicians need to schedule practices with praise team groups and how familiar the musicians are with the assigned songs.  Practices may or may not take place at the church, although most of the organists don’t own organs.  Musicians use church-owned instruments during the worship service.  These musicians have the freedom to solicit work from other churches and are paid directly by families for any wedding or funeral services they perform at my church.

In this example, the argument for classifying these musicians as employees is based on the following facts:

  • The church dictates what music will be played
  • Worship services and certain practice times are specified by the church
  • The church supplies the music and instruments
  • There is no formal service agreement

However, I believe the behavior and financial controls outlined in this example strongly favor the independent contractor classification due to the following facts:

  • The musicians determine their individual practice schedules in terms of how much practice time they need and where to practice (in addition to what is done with praise groups)
  • The musicians have the freedom to decline any offer to perform, arrange for substitutes, and solicit opportunities from other churches and families
  • The musicians are paid a fixed fee regardless of their level of effort

Does issuing a W2 (employee) verses a 1099 (independent contractor) really make that much of a difference?

Sure it does in terms of both government regulation and tax impact.  In terms of government regulation, the church discloses to the government their listing of legal employees through W2 reporting.  W2 recipients may likely receive protection under the US Fair Labor Standards Act (FLSA), requiring a minimum salary of $455 per week or the assurance that stipend individuals are paid at least the minimum hourly wage for their time spent in preparation for as well as during their work at a particular church event.  1099 recipients are responsible for making their own tax estimates to the government and paying for self-employment (Social Security and Medicare) tax on the profit of their work.

Finally, when classifying your paid staff between employees and independent contractors it is also important to:

  • Determine whether or not your church has adequate workers comp and liability insurance coverage on your paid staff (both employees and independent contractors)
  • Establish criteria for determining which people get paid and which ones don’t
  • Reevaluate the amount of stipend paid to those people who are now classified as independent contractors and are therefore responsible for paying self-employment taxes
Posted in:
  • Church Admin & Finance > Taxes and Legal
  • Pastors > Financial Shalom > Church Management
  • Blog
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Let's Discuss…

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Community Builder

Thanks, Jeff, for making us aware of the difference between employees and independent contracts and why it's important. This is good food for thought!

Jeff,

Good job!  I'm beginning to understand the church's challenge is more than spiritual.

In Canadian tax law, the same issue exists, and in this case you cannot determine yourself whether you are classified as an employee or self-employed; it is determined by CRA, the Canada Revenue Agency, according to similar rules that the US IRS uses. The Canadian publicationon this is RC4110, available at http://www.cra-arc.gc.ca/E/pub/tg/rc4110/.

Thanks for this.

Community Builder

The post has been edited to add US! Thanks for Canadian info.  If individuals would like to post blogs pertinent to Canada, let me know!

Community Builder

Thanks so much for your responses and sharing how this issue applies within the Canadian context.  The web link to CRA guidelines is most helpful.  It is nice to see there is some common logic shared by both Canada and USA tax authorities as it pertains to the criteria for classifying paid staff between employees and independent contractors.  The US Internal Revenue Service also offers the option to solicit a determination by filing form SS-8.  The US government web link to this form is http://www.irs.gov/pub/irs-pdf/fss8.pdf .  However, the USA Internal Revenue Service makes no promises for providing a timely determination.

Community Builder

One thing that should be noted when considering the employee versus independent contractor for Canadian tax purposes is an expansion on the use of "tools". In many situations, where the individual has a particular set of skills that is not otherwise easily obtainable (doctors, lawyers and other such professionals being some of the prominent examples) this can lend a lot of weight toward the individual being considered and independent contractor. You might surmise that the same could be possible for musicians - I have yet to meet someone who picks up an instrument and is able to play it skillfully without having played any other instrument before.

While I would highly recommend you seek out a professional opinion before making any determination on your own (and I would note that in my post I am NOT providing an opinion on your situation) this is something to consider as being self-employed has many tax advantages even if there are some shortcomings.

Community Builder

Thanks so much for your explanation as how the "tools" criteria has been expanded within the Canadian context.

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