Pastors, Church Admin & Finance
Employee vs. Independent Contractor (US)
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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
Characteristics of Independent Contractors
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:
However, I believe the behavior and financial controls outlined in this example strongly favor the independent contractor classification due to the following facts:
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:
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Comments
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.
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!
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.
Thanks so much for your explanation as how the "tools" criteria has been expanded within the Canadian context.
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