There are specific rules that dictate whether you should pay someone as an employee or as an independent contractor.
There is no single test for determining if an individual is an independent contractor or an employee. Employee misclassification has always been an important issue and often can trigger IRS attention.
Generally, an employee has an ongoing relationship with the church which includes a job description and compensation paid by the hour or salary. A contractor would have an irregular relationship, no job description and paid by contract only. However, the following guidelines should be taken into account, but are not limited to:
An Independent Contractor:
- Operates under their business name
- Has his/her own employees
- Maintains a separate business checking account
- Advertises his/her business’ services
- Invoices for work completed
- Has more than one client
- Has own tools and sets own hours
- Keeps business records
- Written contracts describing the relationship the parties intended to create and how the parties actually work together.
If you determine that someone should be paid as an independent contractor, you want to be sure you do so properly.
The basic rules are as follows. If you pay a person, non-corporate entity or legal corporation $600 or more in a given calendar year (assuming they are not an employee), you need to obtain a signed and dated IRS Form W-9 and issue a corresponding 1099.
Before you pay an independent contractor anything, you should obtain a signed and dated IRS Form W-9. In this form, the service provider will enter their name (or business name if you are paying an entity) their EIN or Social Security number, and their mailing address. This form has a few other lines and boxes to enter information under certain circumstances.
The IRS Form 1099 (most likely 1099-MISC) to be issued will include information provided in the W-9 including the recipient’s name, taxpayer ID number, and the total amount paid in the given tax year. For this type of 1099, the forms must be completed, postmarked and mailed to the recipient no later than January 31st of the year following the year in which payments were made. The forms must be filed with the IRS (and if done so electronically must also be filed with some States) by the same date.
Reporting payments to independent contractors are important. If you fail to do so, penalties may be assessed. In addition, if a taxing agency decides to conduct an audit to determine if your worker classification is correct, your exposure is greater if you did not pay your independent contractors correctly.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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