04.8 - Employee or Independent Contractor?

by Scott Selman

“For the kingdom of heaven is like a landowner who went out early in the morning to hire laborers for his vineyard.”
Matthew 20:1 (NRSV) 

Knowing whether someone who works for the local church is an employee of the church or an independent contractor is very important. In fact, substantial tax consequences may occur if a church worker is not classified correctly. To determine if a worker is an employee or an independent contractor, local churches and their staff-parish relations committees should consider the relationship between the worker and the church as measured by control and independence.

In Employer’s Supplemental Tax Guide (Publication 15-A), the Internal Revenue Service (IRS) lists three categories that provide evidence of control and independence: behavioral control, financial control, and the type of relationship. The greater the control exercised by the local church, the more likely it is that an employer-employee relationship exists. All information that provides clarity about control and independence must be considered.

Behavioral Control

Behavioral control is based on the degree of the church’s right to determine how a worker does the job they have been hired to do. Factors to consider include:

  •  Instructions the church gives the worker concerning the work schedule, where the work will occur, and how the work will be performed. The amount of instruction will vary according to the task and some positions may require very little instruction. The main concern is whether or not the church has released its right to control the work.
  • Training the church gives the worker, including special requirements for properly performing the work.

Financial Control

Financial control focuses on whether the church has the right to control certain business implications of the worker’s job.

  • Reimbursement of business expenses. Reimbursed out-of-pocket expenses may be inconclusive as to the financial control exerted by the church. However, if the worker incurs certain ongoing business expenses, regardless of whether work is being performed at the church, independent contractor status may be more likely.
  • Work performed at a facility owned by the worker may suggest independent contractor status.
  • Workers who offer their services to other groups or businesses in addition to the local church are probably independent contractors.
  • Payment for services rendered. Employees are usually guaranteed a regular wage amount for a given period of time. Independent contractors are frequently paid a flat fee, even if on an installment basis.
  • Profit or loss. Profit objectives are characteristic of independent contractors.

Type of Relationship

Indicators that facilitate determining the business relationship between the worker and the local church include:

  • Written contracts, although the existence of a contract does not guarantee independent contractor status.
  • Providing the worker with routine benefits, such as health insurance, pension contributions, disability, vacation pay, and sick leave.
  • Permanency and length of service. Is the work ongoing or related to a specific project?
  • The critical nature of the work when compared to the ministry of the local church.  Work that is an important factor for the church in achieving its objectives suggests a degree of control characteristic of an employer-employee relationship. For example, a paid worker who directs the church’s youth ministry is probably an employee.

Generally, most workers hired to do regular and routine tasks at the local church are employees.  In addition, appointed pastors are considered employees of the local church for Federal income tax purposes and self-employed for purposes of Social Security and Medicare. However, local churches may have situations that are unclear. In general, local churches must decide, based on all of the facts known, if there is compelling evidence that a worker is not an employee.

Local churches are required to withhold income taxes and pay Social Security and Medicare taxes on lay employees, and should never assume an independent contractor status exists in order to avoid tax compliance. Improperly accounting for a worker as an independent contractor may result in payment of back taxes, interest, and penalties. Local churches may request the IRS to determine if a worker is an employee by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

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