Director of Connectional Resources
Back in my days as a CPA, I had the unpleasant experience of sitting through a payroll audit for a client.
The IRS was challenging his classification of certain folks as contract labor. My heart ached for the client as he thought he was doing the right thing in hiring folks as jobs came up and issuing 1099s to each of them at year-end.
But the IRS has strict rules about who can be classified as contract labor and who must be on the payroll. Unfortunately, the fines for misclassification are steep, typically 15.3 percent of gross wages for up to three years of wages paid plus other possible penalties.
The IRS has published a list of 20 factors that it takes into consideration in determining whether an individual is an employee or contract labor. I have republished this list on the North Texas Conference website here, under the title of “How to Determine If the Person Working for You Is an Employee or Contract Labor.”
Please note that an individual does not have to meet all 20 factors to be an employee rather than a contract laborer. The primary question is how much control the church has over the method or the results of the labor. Almost without exception, piano players, organists, nursery workers and custodians are employees, not contract labor.
The IRS is offering an amnesty for correcting this misclassification, lowering the penalty to 1 percent of one year’s wages if the employer applies and is approved for the amnesty program. A church needs to file Form 8952 to take advantage of this program.
Once a payroll audit starts, the employer can’t use to this amnesty program. As the public puts more pressure on the U.S. government to operate at a surplus, the government places more pressure on the IRS to collect taxes. And misclassification of workers is one way to do that.
In 2011, the Department of Labor and the IRS agreed to increase their sharing of information about employee misclassification. This issue is very high on their priority list.
I am not an attorney, and I am not providing legal advice on this matter. I am simply trying to bring it to your attention.
We are offering clergy and church workshops in February where this and many other topics relevant to your church will be covered. Frank Sommerville, a local attorney and CPA, will present this workshop. He, along with his wife, Elaine, specialize in church law and clergy tax law. Sommerville has presented seminars on nonprofit taxation since 1981. He regularly assists churches in preventing litigation.
With his significant contributions to the church administration profession, he was inducted into the National Association for Church Business Administration Hall of Fame in 2003. In 2005, 2006 and 2007, The Church Report, a magazine serving larger churches, named Sommerville as one of the 50 most influential Christians in America. In 2011, the Evangelical Council for Financial Accountability named him to its panel of legal experts to assist Senator Grassley and ECFA’s Commission for Accountability and Policy for Religious Organizations. He is an excellent presenter and much-sought after speaker. To register for this conference, click here.
I look forward to seeing you at one of these informative workshops in February.