Employee or Independent Contractor?
Churches are often confused about whether their musician, nursery staff, cook, etc. should be classified as an employee or as an independent contractor. There are guidelines which can help you determine how to properly treat those who work for your congregation.
IRS 20-POINT CHECKLIST
How do you determine if a contractor should be paid on a W-2 or a 1099?
The IRS has established a 20-point checklist the can be used as a guideline in determining whether or not a contractor can legally be paid on a 1099. This checklist helps determine who has the "right of control." Does the employer have control or the "right of control" over the individual's performance of the job and how the individual accomplishes the job? The greater the control exercised over the terms and conditions of employment, the greater the chance that the controlling entity will be held to be the employer. The right to control (not the act itself) determines the status as an independent contractor or employee. The 20-point checklist is only a guideline; it does not guarantee that a person is correctly classified. There is no one single homogeneous definition of the term "employee." Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee.
Following are the 20-points that have been established:
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his/her work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his/her services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his/her services at any time?
In general "no" answers to questions 1-16 and "yes" answers to questions 17-20 indicate an independent contractor. However, a simple majority of "no" answers to questions 1 to 16 and "yes" answers to questions 17 to 20 do not guarantee independent contractor treatment. Some questions are either irrelevant or of less importance because the answers may apply equally to employees and independent contractors.
COMMON MYTHS ABOUT THE MISCLASSIFICATION OF WORKERS
MYTH 1 - Companies are safe if their independent contractors:
- Work sporadically, inconsistently, or on call.
- Work for more than one company.
- Hire and pay their own assistants.
- Claim they operate a separate business or that they are in business for themselves.
- Work independently without supervision.
- Work without interference from the hiring firm; they have inherent freedom in their jobs.
- Work as consultants.
- Work one time only or on an as-needed basis.
- Are paid commissions only or piecework.
- Keep all (or a large percentage) of the fees collected for their services.
- Aren't guaranteed a minimum income by the hiring firm.
- Ask to be treated as independent contractors; the hiring firm is accommodating their wishes.
MYTH 2 - Companies are safe if they:
- Get the worker to agree he is an independent contractor.
- Prepare a written contract stating the worker is an independent contractor.
- Know about other companies which treat similar workers as independent contractors.
- Can prove that a worker performing many tasks is a true independent contractor in at least one task.
- Don't control the independent contractor's actions.
MYTH 3 - Using independent contractors is great because:
- Hiring firms aren't liable for independent contractor's actions.
- Hiring firms can save a lot of taxes, before the government ever catches them.
MYTH 4 - Family members, corporate owners, and domestic workers are like independent contractors, so they don't pay employment taxes:
- My family members (children, spouses, parents) are owners, just like me.
- Corporate directors and sole shareholders are self-employed.
- Baby-sitters, domestic maids and aides to the disabled are self-employed.
MYTH 5 – Non-profits and churches are not covered by IRS classification standards:
- As long as the worker agrees, we don’t need to withhold taxes.
- Since it is ministry, the government can’t require us to pay taxes.
- If we are small enough, or the amount we pay is small enough, we are exempt from these rules.
A TRUE INDEPENDENT CONTRACTOR
An individual that is an independent contractor fills the following roles:
- The independent contractor will work with a number of clients.
- The independent contractor's role is to accomplish a final result and it's the independent contractor who will determine the best way to achieve that result. The independent contractor will define what the agreed upon "result" is in a contract with the customer.
- The independent contractor pays his/her own taxes and files the required government forms.
- A city license, business license, and a fictitious name or dba statement will be obtained by the independent contractor. Also, the independent contractor must obtain any necessary permits.
- Social Security taxes are the sole responsibility of the independent contractor.
- The independent contractor must obtain his/her own benefits including workers' compensation, disability, etc. The independent contractor is not entitled to any typical employee benefits from any government agency.
- Independent contractor agreements traditionally provide professional liability coverage.
While we believe that most nursery staff, musicians, cooks, etc. are employees of the church according to IRS standards, the South Georgia Conference does not engage in offering direct tax advice to clergy or congregations. The South Georgia Conference Office of Administrative Services has provided the content of this page for general informational purposes only. You should not substitute this information for personal consultation with a qualified professional in the field, nor should you solely rely upon this information in taking any action.