This is a guest article provided by Cassidy Jakovickas, CPA at MBS Accountancy.
Churches can unintentionally misclassify workers or volunteers as independent contractors when they should be treated as employees. This is unfortunate since misclassifying workers can result in penalties for your church and be a big red flag for the IRS. To help you avoid these penalties, I’m going to explain worker classification guidelines and tests, and then apply them within the context of a church.
Worker Classification Guidelines
National studies on worker misclassification show that roughly 30% of companies label workers as independent contractors when they function as employees. This misclassification keeps billions of dollars in payroll and income tax revenue from local and state governments. To properly classify your church workers, you can refer to the Common Law Test resources on the IRS website and the ABC Test resources on the Department of Labor’s website.
The Common Law Test
Presumes a worker is an independent contractor unless the criteria are met:
- Behavioral Control – Does the employer direct and control how the worker performs the tasks they’ve been hired to do? If yes, then the worker is an employee.
- Financial Control – Does the employer rightfully control the worker’s finances or provide equipment to perform the work? If yes, the worker is an employee.
- Employer-Employee Relationship – This is determined based on the nature and terms of the contract, as well as whether there are benefits like sick pay or pension. If yes, the worker is an employee.
The ABC Test
Presumes a worker is an employee unless the criteria are met:
- Absence Of Control – Is the worker free from the direction or control of the employer? If yes, the worker is an independent contractor.
- Business Nature – Is the worker performing work that is unusual and unrelated to the employer’s trade? If yes, the worker is an independent contractor.
- Customarily Engaged – Is the worker customarily engaged in their own line of business independent of the employer? If yes, the worker is an independent contractor.
Applying The Proper Worker Classification Criteria
There are two important notes about these sets of worker classification criteria. First, one test may be used by one government jurisdiction while another department uses the other criteria. For example, the IRS uses the Common Law Test while the Department of Labor uses the ABC Test.
It’s also worth noting that each state has adopted its own worker classification test, using the Common Law Test, the ABC Test, or portions of the ABC Test. Based on current regulations, it is possible that a worker may be considered an employee under the Common Law Test and an independent contractor under the ABC Test.
Worker Classification Guidelines By State
Who Is An Employee? Who Is A Contractor?
Worker classification is a common struggle for many organizations, but you can refer to the Common Law Test or the ABC Test to ensure you properly classify your church workers. Here are a few examples:
- Is a church musician a contractor or an employee? Generally, church musicians function more as employees than independent contractors since the church determines the music, dress code, rehearsal times, and where and when to perform their duties.
- Is a Sunday School teacher a contractor or an employee? If teachers are using curriculum and supplies provided by the church, they are likely employees and not independent contractors.
- Is a pastor an independent contractor or an employee? Ministers and clergy have dual-tax status, which means they are church employees for federal income tax purposes and self-employed for Social Security and Medicare taxes. The only exception to the dual-tax status would be ministers who do not pay SECA tax, including those who work for the government, such as military chaplains, hospital chaplains, or those who perform services for nonreligious organizations.
Get Church Tax Help To Properly Classify Workers
While most churches are exempt from income tax, there are many record-keeping and filing responsibilities required of churches and other tax-exempt organizations, as detailed in the IRS Tax Guide for Churches and Religious Organizations. Modern church leaders are choosing church accounting software and nonprofit-hiring tax professionals to free up their time so they can focus on building a ministry that impacts their local community.