W-2 or 1099 form: Which workers get which?

W-2 or 1099 form: Which workers get which?

As the economy continues to expand, churches now more than ever need to possess a thorough understanding of the classification for each person performing services for the church. Knowing whether the IRS views someone as your employee or as an independent contractor dictates tax obligations and associated paperwork, namely whether you bear responsibility for filing a W-2 or 1099 for the individual in question. Don’t risk getting in trouble by issuing the wrong form.

The work done by employees and independent contractors often looks the same.  Though performing similar actions, the law views these two employment relationships in different ways. Assigning the label “employee” or “nonemployee” determines actions such as:

  • Whether or not the employer assumes responsibility for withholding federal, state, social security, and Medicare taxes.
  • Whether the employer must issue a W-2 or a 1099-NEC.
  • Whether or not certain federal and state labor and employment laws apply.
  • How and when someone gets paid (hourly or salary on a set basis for an employee vs. under the terms of an agreed-upon “statement of work” for an independent contractor).

The IRS offers guidelines for classifying someone as an employee or as an independent contractor. In general, greater control and independence by the worker himself points toward classification as an independent contractor. Issues examined often include:

  • Does the church or the worker control how, when, and where work gets performed?
  • Does the church provide tools and supplies or is that the worker’s responsibility?
  • Does the church offer the person benefits that typically signify an ongoing relationship, such as a retirement plan, health insurance, and paid vacation?
  • Is the worker subjected to annual reviews or other evaluation systems commonly used to offer feedback to permanent staff and determine raises and promotions?
  • Does the church regularly require the worker to update skills or attend training to better meet church needs?
  • Does the worker expect to receive a regular paycheck, or does he sign an agreement or job description to receive a set sum of money in exchange for performing certain tasks?
  • Do both church and worker see the relationship as permanent or as subject to end once terms of an agreed-upon contract are complete?

Still unsure whether to consider someone an employee or an independent contractor because different factors point in different directions? Churches that are uncomfortable making the distinction themselves can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax WithholdingThe IRS will review the facts and circumstances to officially determine the worker’s status. Unfortunately, such a judgment can take around six months to receive.

This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.