The W-2s and 1099s have been distributed for last year, but many congregations are wondering if they have classified their employees and contractors correctly. This is important for the IRS, Social Security taxes, the state attorney general’s office, and various federal and state employment laws. How should this be determined?
When a person provides services for an organization, they do so in one of four roles:
- Volunteer
- Casual Employee
- Independent Contractor
- Employee
A Volunteer is unpaid.
A Casual Employee is defined by the IRS as someone who provides occasional work that is not related to the organization’s mission and is paid less than $50 per quarter. No taxes are withheld and a W-2 is not required.
An Independent Contractor provides a service that is not central to the mission of the organization, is not directed or controlled by the organization, and has an established business providing such services. Independent contractors are assumed to carry their own liability insurance. Examples: a plumber, painter, or accountant. An IRS 1099 is required for any contractor paid $600 or more in a calendar year.
An Employee is supervised and paid by the organization for services provided. You should also consult the IRS 20-point test for determining whether or not someone is an employee. An IRS Form W-2 is required.
Note that a congregation’s liability insurance usually covers volunteers and employees, but not independent contractors, since they are assumed to carry their own insurance. This is especially important for those who work with children and youth, as well as building maintenance.
Also note that employees are not exempt from overtime pay unless they meet the definition of an “exempt” employee, as defined by federal and state law.
It has become increasingly important to classify your employees and contractors accurately, since various benefits (sick time, health insurance, etc.) are required for employers with more than a certain number of employees. If the IRS later determines that someone should have been an employee, the employer will be required to pay the employer’s FICA and Medicare taxes, plus interest and penalties.
More detailed information is included on pages 80-84 of the Church Finance Handbook, available on the Resources page.