Classifying Church Workers: 1099 or W-2?

Classifying individuals who provide services to a church as either employees or independent contractors is a frequent responsibility for church administrators. This determination is dictated by federal tax law and depends on the facts and circumstances of the worker’s relationship with the church. An incorrect classification can lead to financial consequences, making a careful evaluation of each worker’s role necessary for compliance.

Determining Worker Status

The Internal Revenue Service (IRS) uses a framework known as the common law test to differentiate between an employee and an independent contractor. This analysis centers on the degree of control a church has the right to exercise over the worker. The test is not a simple checklist but a holistic look at the entire relationship, which is examined through three primary categories: behavioral control, financial control, and the nature of the relationship between the parties.

Behavioral control considers whether the church has the right to direct and control how the worker performs the specific tasks for which they are hired. This includes the level of instruction the church provides, such as when and where to do the work, what tools or equipment to use, and where to purchase supplies. For example, a nursery worker required to work specific hours on Sunday, follow a detailed church-provided childcare curriculum, and use toys and supplies from the church’s closet is likely an employee because the church controls the “how, when, and where” of the job.

Financial control examines the business aspects of the worker’s job. A primary factor is whether the worker has a significant investment in the equipment they use; a sound technician who brings thousands of dollars of their own mixing boards and speakers for a special event exhibits financial independence. Conversely, a church organist who plays an instrument owned and maintained by the church does not. Another factor is the method of payment; an independent contractor is paid a flat fee for a project, while an employee is paid a recurring wage.

The relationship of the parties looks at how the worker and the church perceive their interaction. Written contracts describing the intended relationship are considered, though they are not solely determinative. The provision of employee-type benefits, such as paid time off or insurance, is an indicator of an employer-employee relationship. The permanency of the relationship is also relevant; a long-term, ongoing relationship suggests employment, whereas hiring a painter to complete a single, specific project to repaint the fellowship hall points toward an independent contractor status.

Special Tax Rules for Ministers

Ministers who are ordained, licensed, or commissioned are subject to a unique “dual-status” tax treatment. For federal income tax purposes, a minister is considered a common-law employee of the church. This means the church reports their salary, and the minister is subject to income tax withholding like other employees.

For Social Security and Medicare taxes, the rules are different. Under the Self-Employment Contributions Act (SECA), a minister’s earnings from ministerial services are considered self-employment income. The church must not withhold Social Security and Medicare (FICA) taxes from the minister’s paycheck. The responsibility for paying these taxes, which amounts to 15.3% of their earnings up to the annual Social Security wage base, falls entirely on the minister.

This dual status has financial implications for the minister, who must make estimated tax payments to cover their SECA tax liability. A designated housing allowance, used for expenses related to providing a home, is excludable from the minister’s gross income for federal income tax purposes. It is not, however, exempt from self-employment tax and must be included when calculating the minister’s SECA tax obligation.

Proper classification as a minister is a prerequisite for these special rules. The IRS defines a minister as someone who is ordained, licensed, or commissioned and performs services like administering sacraments, conducting worship, and is considered a spiritual leader by their religious organization. Applying these rules to a non-qualified individual can lead to tax complications.

Tax Responsibilities and Required Forms

For Employees (W-2 Workers)

When a church classifies a worker as an employee, it must have them complete Form W-4, Employee’s Withholding Certificate, to determine the correct federal income tax withholding. The church must withhold income taxes and the employee’s share of Social Security and Medicare (FICA) taxes. The church is also required to pay the employer’s matching share of these FICA taxes.

These funds are reported and paid to the IRS using Form 941, Employer’s QUARTERLY Federal Tax Return. By January 31 of the following year, the church must provide each employee with a Form W-2, Wage and Tax Statement, summarizing their total annual earnings and withheld taxes.

For Independent Contractors (1099-NEC Workers)

The tax responsibilities for an independent contractor are different. The church must obtain a completed Form W-9, Request for Taxpayer Identification Number and Certification, from the contractor before making payments. A church does not withhold taxes from these payments, as the contractor is responsible for managing their own federal income and self-employment tax obligations through estimated tax payments.

If the church pays a contractor $600 or more during a calendar year, it must report these payments to the IRS and the contractor. This is done by filing Form 1099-NEC, Nonemployee Compensation, by January 31 of the next year.

Consequences of Misclassification

Misclassifying an employee as an independent contractor can expose a church to financial liabilities. If the IRS reclassifies a worker, the church can be held responsible for the employment taxes it failed to pay. This includes the employer’s share of FICA taxes that should have been paid.

The financial repercussions can extend beyond the employer’s portion of taxes. The church may also be held liable for a portion of the employee’s share of FICA taxes that were not withheld. The church could also be responsible for unpaid federal unemployment (FUTA) taxes, compounded by interest and penalties.

The IRS established the Voluntary Classification Settlement Program (VCSP), which allows eligible taxpayers to voluntarily reclassify their workers and obtain partial relief from federal employment tax liability. This program requires the taxpayer to agree to treat the class of workers as employees for future tax periods. It also involves paying a reduced amount of the potential tax assessment.