Are most ministers employees or self-employed?
Most ministers have a “dual tax status.” That means that although ministers are always self-employed for Social Security purposes (for their ministerial income), they are usually employees for income tax purposes.
Can a minister ever be self-employed for income tax purposes?
Some ministers are self-employed for income tax purposes. For example, full-time evangelists who receive compensation from many different churches each year are often self-employed for income tax purposes.
Can a minister who is an employee also have self-employment income for federal income tax purposes?
A minister who is an employee for federal income tax purposes can also have self-employment income for income tax purposes. For example, ministers who work for only one church would be employees for federal income tax purposes for their church pay. But if they perform weddings and funerals or occasionally preach at another church for pay, that income should be reported as self-employment income for federal income tax purposes.
Do employees complete their tax returns differently than self-employed persons?
Most taxpayers are familiar with Form 1040, but employees and self-employed taxpayers complete their returns differently. Taxpayers who are employees for income tax purposes can deduct their unreimbursed business expenses on Schedule A only if they itemize their deductions, and only to the extent their unreimbursed business expenses exceed 2% of their adjusted gross income. Taxpayers who are self-employed for income tax purposes report income and business expenses on Schedule C. They can deduct their business expenses on Schedule C even if they do not itemize. Unlike employees, they can deduct all of their business expenses.
Are there any tax advantages to being treated as an employee instead of self-employed for income tax purposes?
Taxpayers who are employees for income tax purposes may benefit from several tax advantages. Employees may exclude the cost of employer-paid medical and dental insurance from income. *They may also exclude the cost of up to $50,000 of coverage in employer-paid group life insurance. Employees may also be eligible to participate in employer-sponsored retirement plans.
*Note: Health care reform has changed the rules regarding how employers may reimburse employees for the cost of health care coverage — and these changes have tax implications.
Are self-employed taxpayers more likely to be audited by the IRS?
Taxpayers who report their federal income tax returns as self-employed persons are more likely to be audited by the IRS. IRS data show that self-employed people are less likely to report their income correctly than employees. Remember that ministers who have income from only one church are likely to be viewed as employees for income tax purposes by the IRS. Churches should issue a Form W-2, not a Form 1099, to minister employees. As explained earlier, ministers often have a dual tax status and will pay SECA taxes on their ministerial earnings, but most ministers should file their tax returns as employees and should receive a Form W-2 from their church.
What can happen to ministers who incorrectly file their income tax returns as self-employed instead of as employees?
The IRS can reclassify ministers as employees for income tax purposes if the IRS decides they should have filed their returns as employees instead of as self-employed taxpayers. Remember that employees can deduct business expenses only if they can itemize and only to the extent their business expenses exceed 2% of their adjusted gross income. If the IRS reclassifies a minister as an employee, the minister may lose business expense deductions and could owe back taxes and penalties to the IRS.
Should churches issue ministers a Form 1099 or a Form W-2?
Generally, churches should issue ministers a Form W-2 because most ministers are employees for income tax purposes even if they are self-employed for Social Security purposes. If a church pays a minister who is truly self-employed for tax purposes, such as a traveling evangelist, at least $600 a year, the church should issue a Form 1099-MISC to the evangelist.
Are churches required by law to withhold income taxes from their ministers’ pay if their ministers are employees for income tax purposes?
No, churches are not required by law to withhold income taxes from their ministers’ pay, even if their ministers are employees for income tax purposes. But many ministers voluntarily elect to have churches withhold income taxes from their pay. Most churches are required to withhold income taxes from non-minister employees.
Are most paid church workers employees or self-employed?
Most paid church workers are employees for income tax purposes. Their churches should use Form W-2, not Form 1099, to report their income.
Can churches classify paid workers as independent contractors to avoid paying FICA or withholding income taxes from them?
No. Churches cannot classify paid workers as independent contractors in an effort to “save money.” They must follow the law. Some ministers think they will save money on taxes if they treat themselves as self-employed for income tax purposes rather than as employees. This is rarely true, but even if it is, ministers and churches should follow IRS rules.
What should churches consider when classifying ministers as employees or self-employed?
Tests used by the IRS and federal courts would classify most ministers as employees for income tax purposes. Remember that most ministers have a dual tax status. Generally, they are employees for income tax purposes but are always self-employed for Social Security purposes with respect to their ministerial income.
The United States Tax Court applied this seven-factor test to ministers in 1994 when deciding if they were employees or self-employed for income tax purposes:
1. The degree of control the employer has over the details of the work.
2. Which party invests in the facilities used for the work.
3. The opportunity the worker has for profit or loss.
4. Whether the employer has the right to discharge the worker.
5. Whether the work is part of the employer's regular business.
6. The permanency of the relationship.
7. The relationship the parties think they are creating.
What should a church consider when treating paid workers as independent contractors instead of employees for income tax purposes?
Remember, ministers usually have a dual tax status and should be treated as employees for income tax purposes and self-employed for Social Security purposes with respect to their ministerial earnings.
Sometimes it’s difficult for churches to decide if other paid workers are employees or independent contractors. Employers should generally err on the side of treating workers as employees if they aren’t sure. If a church treats a worker as an independent contractor and the IRS later reclassifies that worker as an employee, the church could face substantial fines.
For more information about how the IRS decides if a worker is an independent contractor or employee, see IRS Publication 15-A, Employer’s Supplemental Tax Guide (Supplement to Publication 15 (Circular E), Employer’s Tax Guide), on the IRS Web site at www.irs.gov.
These facts suggest to the IRS that a worker is an employee instead of self-employed:
- The worker is required to follow an employer’s instructions about when, where, and how to work.
- The worker receives on-the-job training from an experienced employee.
- The worker is expected to perform the services personally, and not use a substitute.
- The worker has a continuing working relationship with the employer.
- The employer establishes set hours of work.
- The worker is expected to work full time (more than 20 hours per week).
- The work is done on the employer’s premises.
- The worker must submit regular oral or written reports to the employer.
- The employer reimburses the worker’s business expenses.
- The employer furnishes the worker’s tools, supplies and equipment.
- The worker does not advertise his or her services to the general public.
Workers don’t have to meet all of these factors to be considered an employee. If they meet most of them, the IRS will consider them to be employees. That’s why churches should treat workers as employees rather than independent contractors if they are in doubt.
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