Did the Pastor Receive the Proper End-of-Year Tax Document?

2/20/2018

This is the time of the year when people all across the nation are filing their individual income tax returns. In the secular world there is no question as to which form an employee receives from the employer. Unfortunately many Churches are confused as to the proper form they must provide to their Pastor and staff members.

It happened in the suburbs of a large city in Michigan. The Church, with the Pastor’s knowledge, decided to issue 1099-MISC’s to all of the staff. By doing so, they assumed the Church would be exempt from paying the Employer portion of the FICA for staff members who were not ordained ministers (the Church is never allowed to pay any portion of a Minister’s FICA).

Unfortunately one of the musicians was audited and when the IRS agent asked why he received a 1099 from his Church, the musician stated that all employees, including ordained ministers of the Church, had always been issued a 1099-MISC. This prompted an IRS audit of the Church. Because the Church had 15 years worth of records on site, the IRS found violations in all 15 years and assessed a 10 Million Dollar lien against the Church and Trustees.

There Is No Happy Ending for This Church

What makes this story so sad is that after the audit, the Pastor conducted a Board Meeting and informed the Board that the Church would continue to function as it always had, in spite of the IRS findings.

The head Trustee attended our Church Management and Tax Conference the day after the Pastor’s Board Meeting, and with tears in his eyes asked me what he should do. My advice was simple. Since the Pastor did not want to obey the IRS regulations, when the IRS initiated further investigation into the Church, the Head Trustee should turn State’s Evidence and cooperate with the Federal Marshals.

A year later I was back in that city for another Church Management Conference and the same gentleman approached me. This is the story he told: “I did what you advised. When they showed up to further investigate I had everything documented including my rebuke of the Pastor for refusing to obey the regulations and that I had resigned my position.” He then told me how the Pastor had been indicted and the Church property had been sold to satisfy the IRS debt. Neither the Church nor the Pastor has the legal right to determine how to classify an employee. All who are paid by the Church must be classified according to IRS regulations.

A Huge Penalty for Misclassifying Employees

Everyone working inside the Church, Janitors, Nursery Workers, Musicians, and Pastoral Staff, etc. are employees and must receive a W-2 for the income they received. And this is especially true for the Pastor. According to Code Section 1.1402(c) of the Internal Revenue Service, no one is a self-employed independent contractor if he or she performs services as a minister. The penalty for misclassifying employees as independent contractors is huge.

Included in this income must be their Gross Pay including any bonuses, “love offerings,” etc. The Church must also pay the Employer portion of FICA (currently 7.65%) for all employees who are not ordained ministers performing sacerdotal duties.

Operating Legally is Much Less Expensive

While Churches issue 1099’s to employees in hopes of saving money, the cost to the Church, when it is caught, will be much greater than the dollars spent to operate according to the law.

In addition to operating according to the Laws of the land (Romans 13:1-6) you must also operate according to God’s law and Jesus said, “Render to Caesar that which is Caesar’s” (Matt. 22:21).

Pastor and Church Leaders, the IRS may not have yet knocked on your door, but God has. It could be that your Church struggles financially and numerically because you have violated God’s law in attempts to save a few dollars. GOD WILL NOT BLESS A MESS!

You Need To Contact Us NOW!

Pastor, if you have been issued a 1099-MISC from your Church; or Church Bookkeepers, if you issued 1099s to all whom you paid this past year, you and your Church are in trouble. You need to call us NOW!

Chitwood & Chitwood is the premier Church Management firm in the nation. With 80 years of experience we know exactly how to fix this problem now. The last thing you need at your Church is for the IRS to show up at your door. To alleviate these and other problems you must call 800-225-5849 and ask for Mr. Tim Haney. He will get you and your Church on the road to compliance and fix any problems of your past. Do not wait until they catch you.

We encourage every Pastor, Church Leader, and Church Bookkeeper to attend the nearest Church Management and Tax Conference where you will learn the latest regulations of the IRS and how to avoid the penalties they will assess. To register, visit our website at www.cmtc.org or call 800-344-0076. It will be the best investment your Church makes this year.