W-2 or 1099?

Written by Julie Bloss

Should your church give you a W-2 or a 1099? Should your ministers get W-2s or 1099s?

Ministry assistants, ministers, and other paid staff should be able to answer these questions. Unfortunately, many churches don't use the right forms. And that may increase their workers' chances of being audited.

Here is the rule: An employee for income tax purposes should get a Form W-2 and an independent contractor (self-employed worker) should get a Form 1099.

Keep in mind that ministers have what is called a dual tax status. They are always self-employed for Social Security purposes. That means they pay SECA on their ministerial income; however, they are usually employees for income tax purposes. Ministry assistants, on the other hand, are usually employees for both income tax purposes and Social Security purposes.

Important Issue
The Internal Revenue Service (IRS) views all paid workers as either employees or independent contractors (self-employed). Why is that distinction important? Because people who are employees for income tax purposes and people who are self-employed are subject to different tax rules.

The IRS is more likely to audit someone who is self-employed. That's because statistics show that self-employed taxpayers are less likely than employees to report their income correctly. If the IRS decides that a taxpayer has incorrectly filed as self-employed, the IRS can reclassify that person as an employee. Taxpayers who have improperly filed as self-employed may lose their business expense deductions, and that could mean back taxes and penalties.

By law, churches don't have to withhold taxes from ministers' income, but most employers have to withhold taxes from their other employees. Ministers may elect to have income taxes voluntarily withheld from their paychecks, and generally churches should withhold taxes from ministry assistants' paychecks because they are employees for income tax purposes. If a church is incorrectly treating a ministry assistant as self-employed and issuing a 1099, the church probably isn't withholding taxes as required by law.

Important Factors
Just because an employer calls a worker an independent contractor doesn't mean that person is an independent contractor in the eyes of the IRS. The IRS developed a list of 20 factors to determine whether a worker is an employee or an independent contractor.  These 20 factors were published in Revenue Ruling 84-41.

In Weber v. Commissioner, 103 T.C. 19 (1994), the Tax Court decided that Methodist ministers are employees for income tax purposes. The Tax Court found that Reverend Weber, who filed his tax return as a self-employed person, was an employee. The court focused on 7 of the 20 factors used by the IRS. The court said that no single factor would determine the issue, and that each individual minister's facts and circumstances would be important. Here is how the court analyzed the seven factors in Reverend Weber's case.

1. The degree of control the employer has over the details of the work. The court said that the "right of control" test is the most important factor in deciding whether a minister is an employee or self-employed. Although the court recognized that employers usually has less control over professionals like ministers, it still found that the church had a lot of control over Reverend Weber.
2. Which party invests in the facilities used for work. Reverend Weber's church gave him a place to prepare sermons and preach. He did some work at home, but the court said that was his choice.
3. The worker's opportunity for profit or loss. The church paid Reverend Weber a salary and gave him a housing allowance. He couldn't increase his profits except by performing more weddings and funerals. He also didn't risk losing money while employed by his church.
4. Whether the employer has the right to discharge the worker. His denomination could discipline or discharge Reverend Weber or revoke his ministerial credentials.
5. Whether the work is part of the employer's regular business. Reverend Weber's work was an integral part of the United Methodist Church, and he had to conform to its mission.
6. The permanency of the relationship. The court said the relationship between Reverend Weber and his denomination was supposed to be permanent.
7. The relationship the parties think they are creating. Reverend Weber and his church thought that he was an independent contractor, but the court didn't give that much weight.

Lessons for Churches
If you apply those seven factors to you or to your minister, you'll conclude that most Southern Baptist ministers and ministry assistants are employees for income tax purposes, not independent contractors. That means they should get W-2s, not Form1099s. If your church has always given its paid staff 1099s instead of W-2s, it's time for a change.

Julie Bloss is a freelance writer and an attorney at the Annuity Board of the Southern Baptist Convention. This article contains general information only. Please consult an attorney or CPA for more specific information.

Adapted from the Winter 1998-99 is of Secretary: FYI. Used by permission.

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