Does our church have to issue 1099s or W-2s? This is one question I get more than any other. There are many ways and many contexts in which this question is asked, but the motive is fairly consistent. Church administrators and treasurers are trying to determine what is considered to be taxable income and how should that income be reported to the person who received it.
On a very basic level, Forms 1099 and W-2 are forms used to report income to both the person and the government. Which form to use is not as complicated as one might think. Form 1099 is for reporting income to independent contractors (people who are self-employed), and Form W-2 is for reporting income to church employees. The real issue for church administrators is not so much to determine what is considered taxable income and what is not. Attorney Frank Sommerville makes this determination very simple. He says, “Everything is taxable, unless there is a provision in the tax code saying otherwise.” The real issue is to determine whether the person is a self-employed independent contractor or an employee of the church.
The IRS has provided a great deal of free resources to help employers determine the proper classification for workers. One tool it provides is called the 3 Common Law Rules. The 3 Common Law Rules fall into three categories: behavioral, financial, and type of relationship. There are questions to ask which help determine how workers fall within these categories.
Does the church control or have the right to control what the worker does and how the worker does his or her job?
Are the business aspects of the worker’s job controlled by the church? (These include things like how the worker is paid, whether expenses are reimbursed, who supplies the tools/supplies, etc.)
Type of Relationship
Are there written contracts or employee-type benefits (i.e. pension plan, vacation pay, insurance, etc.)? Will the relationship continue and is the work performed a key aspect of the church?
While one worker may, in some instances, seem to be an independent contractor and others seem to be an employee, it becomes important to look at the entire relationship. The primary issue is how much control the church has over the work, how it is performed, and when it is performed. The greater control the church exerts, the more likely the person is an employee.
This gets to the real issue at hand. For everyone classified as a non-ministerial employee, churches are required to adhere to federal wage, hour, and overtime laws. They must also withhold payroll taxes and submit them on behalf of employees and the church to the government. Independent contractors are required to report and pay their own taxes. Because it helps the IRS get money more quickly, the rules provided by the IRS will more than likely push most folks to the employee, not the independent contractor category.
A good practice for churches is to look at all of the people whom they provide forms of compensation. Apply the 3 Common Law Rules and determine whether they are employees or independent contractors. Classifying employees and independent contractors correctly is something churches should take very seriously, and it is worth the work to correct any problems in this area.