An individual providing services to a church for compensation receives a Form 1099-MISC reporting the earnings to the church worker. Unlike the typical Form W-2 provided to an employee which reports both earnings and withholdings, no taxes were withheld on the money. At tax time, these individuals are often surprised to learn that the Internal Revenue Service and their tax software provider treat them as small business owners subject to both self-employment (SE) and income taxes on the earnings. Is there another way to report these earnings and avoid SE tax?
Form 1099-MISC reports payments to individual independent contractors (e.g., not corporations) for services rendered when the amount exceeds $600 per year. Unfortunately, many churches are unfamiliar with the rules for classifying a worker either as an employee or an independent contractor. IRS Form SS-8 may be submitted to the Service for a determination. However, this step is rarely necessary if the church officers carefully consider the guidance provided by the IRS either in the instructions for Form SS-8 or on its website. Typing "independent contractor" in the IRS search window is sure to bring a hit near the top of the list on this topic.
In most cases, non-ministerial church workers (individuals who are not performing the functions of a minister) should be classified as employees and subject to FICA withholding (and matching by the church) and income tax withholding. A common situation when independent contractor status is appropriate relates to a church employing a janitorial or other service firm to render services. On the other hand, the typical church janitor, office employee, etc. should not be treated as an independent contractor.
When an error in classification is discovered the church should take immediate action to correct the error. This may require the use of newly adopted IRS Form 941-X and correction of previously issued paychecks. The employee may owe the church his or her share of the FICA tax not previously withheld.
When the error is not discovered until well after the previous year is complete, the employee who was erroneously classified as an independent contractor may have little recourse but to pay the full SE tax.