What, Besides Money, Do Churches Owe the IRS?

by Sarai Rice

Today, I’m talking to the 95% of you who think IRS rules are not as interesting as biblical texts or pastoral visits. You may be right 🙂 ! However, not caring about IRS rules could cost your congregation time and money.

Let’s start where I started this week—with a religious body that has been paying a non-minister more than $600 a year for years, on a per unit basis, to market a fair-trade product, but without filing a 1099-MISC or a W-2 to report the payments.

Do we have a problem?

To answer this question, we first need to know that every church has the obligation to participate in federal payroll tax withholding by withholding and reporting all employee income taxes and Social Security taxes. Two caveats:

• Ministers have their own set of rules about how this works, which I’m not addressing today.
• Some churches have challenged this obligation in court on the grounds that it violates the principle of separation of church and state, but the courts have so far upheld the obligation to withhold and report.

Next, there are two basic mechanisms for reporting—the 1099-MISC and the W-2. Broadly speaking, the 1099-MISC is used to report the income of those who are self-employed and who have been paid more than $600 in a year. When a 1099-MISC is used, nothing has been withheld by the organization because the self-employed person is responsible for his or her own taxes. The W-2 is used to report the income of employees, for whom standard withholding applies. Everyone to whom your congregation pays more than $600 in a year should always be provided with one of these forms, a copy of which is sent to the IRS.

Which tax form should we file?

Now for the messy part—should our worker be classified as an employee, with all their attendant withholding requirements, or as a self-employed worker for whom there is no withholding obligation? Here’s where a lot of us throw up our hands because, as is often the case with the IRS, it’s not as easy as it looks.

In general, a self-employed worker is not subject to the control of an employer regarding the details of how a job is done. He or she also typically offers his or her services to others. However, a variety of other factors are also looked at in determining employment status, including but not limited to:

• Is the worker expected to perform the services or can a substitute be used? Self-employed workers are more likely to be allowed to provide their own substitute.
• Does the worker hire and pay assistants or does the organization? Self-employed workers are more likely to hire and pay their own assistants.
• Does the worker or the organization establish work hours? Self-employed workers are more likely to establish their own hours.
• Is the work done on the organization’s premises? Self-employed workers are more likely to work off-site.
• Are business expenses reimbursed by the organization? Self-employed workers are more likely to have business expenses that are not reimbursed by the organization.
• Does the worker or the organization furnish the worker’s tools, supplies, and equipment? Self-employed workers are more likely to invest in and provide their own tools.
• Does the worker work for other organizations? Self-employed workers are more likely to work for multiple organizations.
• Does the worker advertise his or her services to others? Self-employed workers are more likely to advertise their services to others.

Frequently, the answers to such questions will be mixed—some in favor of employee status, some in favor of self-employment. In such cases, the IRS (and the worker, in case of a conflict) is apt to take the view that an employer-employee relationship exists. If you are doubt, you should treat the person as an employee and consult an attorney.  My own attorney often spoke of using the smell test—since the tendency of employers is to reduce cost and paperwork by avoiding withholding requirements, if an arrangement smells like employment, it probably is.

To see a full discussion of the difference between self-employed workers and employees, see the IRS website. And when in doubt, check with your accountant or an employment attorney. In general, however, it is safe to follow the guidance of the experts, who say that “church secretaries, teachers, choir directors, preschool workers, and business managers almost always … will be employees of the church (unless they represent temporary help secured from a local temporary help service). Church custodians who work full-time similarly will almost always be employees subject to withholding.”

To return to our non-filing religious body, then, we do have a problem. In this case, a person was paid for work and nothing was withheld or reported to the IRS. In this particular case, the likelihood is that the person will be considered to have been self-employed and so no withholding will have been necessary, but organizations who do not submit a 1099-MISC are still subject to penalties for non-compliance with federal payroll tax reporting rules.