Avoid Classifying Employees As Independent Contractors

Avoid Classifying Employees As Independent Contractors

Q: Can churches classify paid workers as independent contractors to avoid paying FICA or withholding incomes taxes from them?

A: No. Churches cannot classify paid workers as independent contractors in an effort to save money. They must follow the law.

For a non-clergy employee, the church generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and deposit the taxes with the government in a timely manner.

The church must also pay its own share of FICA taxes for the employee. These taxes can be significant. For 2020, the employer’s FICA share is equal to 7.65% of earnings up to $137,700 and 1.45% of earnings exceeding that amount.

In contrast, if the worker is an independent contractor, the church does not withhold federal income or FICA taxes — nor need to pay any FICA or federal unemployment taxes on the worker’s earnings.

Because churches have financial incentives for characterizing employees as independent contractors, the IRS has the authority to impose heavy penalties for misclassifications. Churches can be held liable for employment taxes for misclassified workers, and additional penalties may apply.

To determine whether a worker is an independent contractor or an employee, the IRS examines the degree of control and independence in three broad categories — behavioral, financial, and type of relationship. No single piece of evidence —such as, for example, a written agreement expressly stating that the worker is an independent contractor — will control the determination.

A church that is unsure about the proper classification can ask the IRS for a determination. Though these decisions may take six months or longer, a church that continually hires the same types of workers may want to consider filing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

A church is required to obtain a taxpayer identification number (TIN) from any contractor who receives $600 or more in payments.  A Form W-9 facilitates obtaining this information, and in certain situations, you may be required to request the TIN with a Form W-9. Contractors that refuse to provide a TIN are subject to backup withholding, and your church can be penalized for not withholding the required amount.

On Form W-9, the contractor identifies the type of organization and provides the legal name and matching TIN. It is a good idea to have this form on file as proof that you sent information to the IRS as it was provided to you by the contractor. Also, since you are not required to file a Form 1099-MISC for payments to corporations, this form provides proof that you were told the contractor was a corporation.
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