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.
How do you determine if a contractor should be paid on a W-2 or a 1099?
The IRS has established guidelines 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 list below is only a guideline; it does not guarantee that a person is correctly classified. There is no one single homogenous 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.
To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:
- Significant investment in the equipment the worker uses in working for someone else.
- Unreimbursed expenses: independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
- Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
- Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are key activities of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
- If your church tells your pianist when they must play (11 am Sunday), what they must play (hymns from our hymnal), invests in the piano (the pianist does not bring their own), and the music is provided for the worship service (a key activity), your pianist is likely a church employee, not a contract worker.
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.