by Heather Kimmel | published on Apr 5, 2022
Is your Local Church minister a W-2 employee, or an independent contractor that receives a Form 1099-NEC (nonemployment compensation) at the end of the year? Several recent inquiries to the Office of General Counsel indicate worker classification causes some confusion in Local Churches.
Most importantly, whether a minister is an independent contractor or a W-2 employee is not the choice of either the minister or the employer. It is established by law based on the circumstances of employment, and a misclassification can result in tax penalties to both the minister and the employer. Under most circumstances, a Local Church minister in the United Church of Christ is properly classified as a church employee. The Local Church should withhold federal and required state income taxes from the minister’s pay, but not FICA tax, and should provide the minister a W-2 at the end of the year. The minister should pay SECA tax on their own. Read on for more information about why a minister’s worker classification may be confusing, and the factors that the IRS considers to determine whether a minister is a W-2 employee or an independent contractor.
Ministers are Self-Employed for Social Security Purposes
Confusion about a minister’s worker classification may result from a minister’s dual status for federal income tax reporting purposes.
Most employees— of Local Churches and any other businesses— pay federal income tax, and also pay a federal payroll tax, called the Federal Insurance Contributions Act, or FICA tax. The FICA tax funds Social Security and Medicare programs. The employer also pays a FICA tax equivalent to the amount paid by each employee. The amount of the tax is based on the employee’s earnings. The employee’s portion of the FICA tax is withheld from the employee’s wages by the employer. The employer generally files payroll tax returns with the federal government to pay its portion of the tax.
Ministers, however, do not pay FICA. Under Internal Revenue Code § 3121(b)(8)(a), a minister’s services in the exercise of their ministry are excluded from the definition of employment that results in the application of FICA. These services are defined by the Internal Revenue Code, and include ministration of sacerdotal functions (the sacraments, for example), the conduct of religious worship, and the control, conduct, and maintenance of religious organizations for a church or denomination. 26 CFR § 1.1402(c)(5). Essentially, the customary duties of a Local Church minister in the United Church of Christ will qualify as services performed in the exercise of ministry.
Because a minister’s services to their church do not qualify as employment for the purposes of FICA, ministers are treated as self-employed in the exercise of their ministry for the purposes of Social Security. Self-employed persons do not pay FICA. Instead, they pay a self-employment tax under the Self-Employment Contributions Act, or SECA tax. This tax is not withheld by an employer; it is paid by the minister directly to the federal government. The historical reasons for this different treatment are beyond the scope of this post. Some ministers reading this post may be aware that a minister may qualify for an exemption from self-employment taxes if they file Form 4361. Note, however, that this exemption is only available to a minister who has a conscientious objection to the acceptance of Social Security benefits under their religious principles, and meets other criteria.
It is not legal, nor is it proper reporting, for a church to withhold the FICA tax from a minister’s income and pay the employer’s share of the FICA tax, for services in the minister’s exercise of their ministry.
There are a few exceptions to the rule that ministers must pay SECA and employers must not withhold FICA from a minister’s pay. These are largely beyond the scope of this article but include ministers who work for the government (such as military chaplains or hospital chaplains in government-owned hospitals) and those who perform certain work for nonreligious organizations. Please consult with a CPA or tax attorney for more information on these exceptions.
While ministers are unlike many other employees because they do not pay FICA, they are similar to other employees in that they do pay federal income taxes on the income earned by providing their services.
Employee or Independent Contractor?
This brings us to the question of whether a church should withhold federal income tax and treat the minister as a W-2 employee, or whether a church should treat the minister as an independent contractor and report the minister’s income on Form 1099. Remember, it is not the minister’s choice or the church’s choice— it is a question of correct classification under the law based on the circumstances of employment.
A number of tests for whether a worker is an employee or an independent contractor have been developed over the years by the IRS, the Tax Court, and other courts. The tests consider similar factors. No one factor is considered determinative, and all factors are considered together to make a determination. Here are some of the typical factors:
- Whether the work is part of the employer’s regular business: a worker that is doing work customary to the employer’s regular business is more likely to be an employee than an independent contractor. Ministers carry on the regular business of the church. Additionally, if a worker carries out work for an employer as an employee, it may be very difficult to argue that subsequent workers performing the same work are independent contractors.
- Degree of control exercised by the employer over the details of the work: if the employer tells the employee when and where to work, the worker is more likely to be an employee. Ministers typically perform their services according to regular hours set by the church.
- Whether the worker has an opportunity for profit or loss: employees are typically paid a salary and do not realize profits or losses relating to their work, while independent contractors do. Ministers are typically paid a salary by the church. A related factor that is sometimes considered is whether the worker has the ability to hire and pay (from their own income, not the employer’s income) additional workers to perform the work instead of performing the work personally. If so, that worker is more likely an independent contractor. If not, the worker is more likely an employee.
- The permanency of the relationship: a long-term relationship is typical of an employee; a shorter-term relationship is more typical of independent contractors. Most Local Church ministers have an open-ended call that is indicative of a more permanent relationship.
- What the parties believe about the relationship they are creating: offering a worker fringe benefits (pension, health care, reimbursable expenses, etc.) and regular pay indicates the worker is a W-2 employee. Often Local Church ministers are provided access to pension plan and group health insurance, and the church reimburses their expenses.
Other factors that, if present, may indicate that a worker is an independent contractor are whether the worker works for more than one organization at a time, makes their services available to the general public, and provides their own equipment and premises. Other factors that, if present, indicate that a worker is an employee are whether the worker is required to work full time, required to provide regular reports to the employer, and can resign without incurring liability.
Under these factors, most Local Church pastors in the United Church of Christ will be W-2 employees of their Local Churches. There may be some exceptions to this. For example, a supply pastor who ordinarily provides services to more than one church at a time may be an independent contractor when all of the circumstances are analyzed under the factors. If you have questions about whether a Local Church minister is correctly classified, you should seek the advice of an attorney with experience in these matters.
The following resources may be helpful to your church:
- IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers
- IRS: Independent Contractor or Employee?
- Church Finance Handbook, from the Southern New England Conference of the United Church of Christ
- Clergy Tax Return Preparation Guide for 2021 Returns, from the Pension Boards— United Church of Christ, Inc.
The information provided in this article is not legal advice. If you need legal advice, please consult with an attorney.