Church Tax and Employment Issues – Part 3 of 4: Classification of Workers
It always seems easier to say and pay someone as a “contractor” when they only work a few hours a week, or they only work during a certain season – but is it correct to do so?
Why do churches do this? Pay someone as a contractor rather than as a W-2 employee?
- They do not want to go through the paperwork that a W-2 employee requires:
- State Hiring Form
- They do not want to do the paperwork required to track and pay employer-portions of Social Security or Medicare taxes.
- The person only works a couple of hours a week or a month
BUT THERE ARE FAR REACHING CONSEQUENCES TO MISCLASSIFYING a worker There are implications as to the church’s responsibility under the Federal Insurance Contributions Act (FICA), income tax withholding responsibility, and the Fair Labor Standards Act (FLSA) as well as benefits plans. Non-profits with more than four employees also have a responsibility to pay State Unemployment Taxes (SUTA) in Texas.
I have, personally, seen a nonprofit suffer substantial penalty and interest payments along with the back taxes required by the government. It is not a pretty picture.
Bottom line – if you are paying someone an hourly wage, it is almost impossible to justify that they are an independent contractor. This means that custodians, nursery workers and musicians should probably be treated as employees.
Independent contractors normally set their own hours. They determine when and how they work. They are paid “by the job” and they offer their services to the public. They absolutely provide their own tools or supplies.
The key issue is the amount of control and direction the church or nonprofit has over the worker. If you are unsure, err on the side of treating the worker as a W-2 employee.
If you need more information or would like to discuss, contact us today and we’ll talk!