Worker Classification – Use Caution When Classifying Workers as Independent Contractors

Misclassifying an employee as an independent contractor adversely affects the worker because the employer's share of taxes is not paid, and the employee's share is not withheld.¹

If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

According to the Internal Revenue Service (IRS), all U.S. employers are required to place their workers into one of five categories for tax purposes:²

• Independent contractor—The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Independent contractors are self-employed.
• Common-law employee—Anyone who performs services for you is your employee if you can control what will be done and how it will be done. What matters is that you have the right to control the details of how the services are performed. The substance of the relationship governs the worker’s status.

These other categories rarely apply to ministries:

• Statutory employee—Workers that are independent contractors can be treated as employees if they meet specific criteria and meet certain conditions outlined under Social Security and Medicare taxes. 
• Statutory non-employee—This category includes direct sellers, licensed real estate agents and certain companion sitters.
• Government worker—These are individuals who serve as public officials. The government entity is responsible for withholding and paying income taxes.

Generally, a ministry does not have to withhold or pay taxes on payments to independent contractors. However, an incorrect classification could leave a ministry vulnerable to paying back taxes, large fines, and other penalties if the worker is later determined to be an employee.

Assessing a worker for tax purposes: 3 tests

Common law rules. The key to assessing a worker’s status is the relationship between the business and the worker. In order to determine if a worker is an employee or independent contractor, the IRS looks at many factors, including:

• Behavioral Control—Does the company control or have the right to control what the worker does and how the worker performs the job?
• Financial Control—Are the business aspects of the worker’s job controlled by the payer? These include things like how worker is paid, whether expenses are reimbursed, or who provides tools and supplies.
• Type of Relationship—Are there written contracts or employee-type benefits (e.g., pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?

Typically, no single factor makes the determination, and relevant factors in one situation may not apply in another. Make sure you document all factors used in making this determination for workers in your ministry.

Liability and other issues

The IRS determination deals with tax status only. It does not apply to liability or workers’ compensation issues. One way to limit a ministry’s liability is to require the independent contractor to indemnify the ministry for his or her own liability. The contractor also should provide a certificate of liability insurance, demonstrating what coverages apply to the independent contractor’s activities.

Independent contractors are rare

The vast majority of church workers, including ministers, have an employer-employee relationship with their churches. However, one example of an independent contractor could be a traveling evangelist who is paid for his services by a number of churches. If a church pays him at least $600 in a year and the evangelist qualifies as an independent contractor for tax purposes, the church should issue these self-employment tax forms: IRS Form 1099 MISC and Transmittal Form 1096.

If you make the determination that services will be supplied to your ministry by an independent contractor, this sample Independent Contractor Agreement can help your ministry and a locally licensed attorney get started.

Ask for help

There are several ways to obtain help if your ministry is unsure of how to classify a worker. For help understanding how the law applies in your situation, check the common-law rules in IRS Publication 15-A. If you need specific advice, contact a licensed attorney in your area. An employment lawyer will know the applicable local laws and should be able to tell whether your ministry is in compliance.

If there is still confusion over a worker’s tax status, you can take your case directly to the IRS by completing Form SS-8. The IRS will make a determination on the worker’s status based on the facts you present on the form.

Reclassifying existing workers

If you determine your ministry has misclassified a worker, consider the Voluntary Classification Settlement Program (VCSP). VCSP is an optional program that provides eligible organizations the opportunity to reclassify workers as employees. Some benefits of VCSP include:

• Partial relief from federal employment taxes.
• Release from liability for interest and penalties on the tax amount due.

To participate in this voluntary program, exempt organizations must meet certain eligibility requirements—apply by filing Form 8952.

When in doubt, ask a lawyer. Classifying workers can be a complex task, and should involve consultation with a locally licensed attorney or ministry tax professional. By using these available resources, you can help make sure your ministry complies with the law and continues working toward its mission.

Finally, Legal Assist^SM is a free service offered by Brotherhood Mutual^®. It offers guidance on complicated questions related to ministry activity, employment law, contract wording, and more.*

*Important information: Brotherhood Mutual is pleased to provide Legal Assist as a complimentary resource. The services we offer through Legal Assist are intended to provide general legal information to our current and prospective policyholders.

Related resources

• Tax Planning for Employee Benefits
• Paying Church Employees Overtime

1 ”IRS reminds business owners to correctly identify workers as employees or independent contractors.” Internal Revenue Service, 15 September 2021. https://www.irs.gov/newsroom/irs-reminds-business-owners-to-correctly-identify-workers-as-employees-or-independent-contractors. 
2 “Independent contractor (self-employed) or employee?” Internal Revenue Service, 6 February 2024. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. 

Updated February 7, 2024

The information in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program..