The Church Can’t Choose Who Is and Who Isn’t

During the Board Meeting the issue of payroll came forth for discussion. The Church was straining to pay all of those whom they had decided to hire. Pastor Morgan and the Treasurer seemed to have a great solution for the problem—issue 1099 MISC’s to all employees and let them serve as independent contractors to the Church. This way the Church would not have to pay matching Social Security and the musicians, praise team singers, and youth Pastor would not only assume all costs of Self-Employment tax, but also be responsible for their own insurance. The Pastor entered that as a motion which was passed unanimously by the Board.

Church Is Devastated by the Consequences

Two years later one of the musicians was subject to an IRS audit. When the agent asked the musician what he did the musician replied, “I play the keyboard for my Church.” The agent then asked him why he was issued a 1099 instead of a W-2, to which the musician answered, “All employees in our Church receive 1099’s.”
 
This triggered a massive audit of the Church resulting in about one million dollars in penalties, taxes, and interest. Had it not been for an unknown benefactor the Church would have had to disband and sell its property to settle its debt with the IRS.

This Happens More than we Realize 

As I travel across this great nation teaching Clergy Tax and Law Conferences I am amazed at the number of great Pastors and Churches who are uninformed or do not care about certain laws that apply to Churches. Just because there is the “Separation of Church and State,” we must remember that now, for the most part in the mind of the Government, that means “separation of the Church from the State, but not vice versa.”
 
Our Government is inching more and more into affairs of the Church, some of which may be justified because of some shenanigans that take place in the name of religion, but mostly the intrusion is unwarranted.
 
Until we elect Government officials that are Christian friendly or are genuinely Christian, and they will enact new laws to protect our Churches, we must obey the law. The Holy Spirit commanded us, via the Apostle Paul (Rom. 13), to obey the laws of the land. The only time Scripture gives us the option to disobey is when the laws of the land violate God’s Law (Acts 5:29).
 
Although the current laws may be burdensome for a Church, they are not violating Scripture and therefore it is our responsibility to obey. One of the laws I find that is often violated is the misclassification of employees.

What Constitutes an Employee?

An employee is anyone that is connected to the Church and performs a service, subject to the will and control of the employer, both as to what shall be done and how it shall be done.
 
The Church is not allowed to choose who is an employee and who is an independent contractor—that decision is made by IRS guidelines to which a Church must adhere.
 
The above definition is just one of the items of the Common Law Employee Test. This means that most of the people performing services for a Church, should be receiving a W-2, not a 1099-MISC.
 
There are huge penalties for misclassification.

Musicians and Pastors are not Independent Contractors

The biggest two categories that are most often misclassified are those of the Pastor and the Church musicians. Both of these groups are employees and their income must be reported on a W-2.
 
If the musicians are not Ordained Ministers, the Church must withhold FICA and must pay the matching portion. This will be a heavy 941 tax burden for many. The best way to overcome this is to get all paid musicians ordained through the International Congress of Churches and Ministers and then, even though the income is reported on a W-2, the Church is not responsible for FICA. If the Church provides the ordination via the local assembly they must be aware that any credentials issued may not be legitimate for tax purposes. Churches may call us at 800-854-5891 or visit www.iccmworldwide.org for more information on a valid ordination process.

My CPA Told Me Something Different
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Local CPAs are great for what they are trained to do – local small business and individual tax returns. Only four percent in America know how to properly do Church books. In a recent conference a Pastor told me he was in trouble with the IRS because a local CPA told him the Church could report his income on a 1099-MISC rather than a W-2.

Churches must be very cautious as to whom they allow to do their books and records. Even an IRS agent may give you incorrect information but you would still be accountable if it violated a tax law (Massey vs The Commissioner). If your Church is not a client of Chitwood & Chitwood, the keeper of your books and records may know just enough to get you in trouble. Remember, cheap advice is expensive.

Conclusion

Chitwood & Chitwood conducts about 150 Church and Clergy Tax Conferences across the USA every year. Our 80 years of experience demonstrates our impeccable record of properly maintaining Church books and records. We are the BEST!

As the ultimate firm in this area of expertise, it would behoove every Pastor and Church Board Member to attend the next conference nearest you. Call 800-344-0076. You will not regret it.

For us, this is “A Ministry – Not A Job!”
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By Dr. Michael Chitwood

 

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What You Will Learn at our  Conferences

Our  Church Management Conferences  will arm you with the information you must have to shield your Church or Ministry from IRS intrusiveness; teach you how to get your Taxes to the lowest possible rate; and daily operate your Church or Ministry within IRS acceptable guidelines.

Our  Conferences  have been taught across the Nation for over 48 years. Because of the Penalties, Fines, and even Imprisonment that the IRS imposed on many Churches and Pastors, Dr. Chitwood felt led by the Holy Spirit to become a buffer between Churches, Ministers, and the IRS.

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