Background. Church treasurers often are not sure whether to treat pastors or some lay workers as employees or self-employed for federal tax reporting purposes. The distinction is important for several reasons, including the following:
• W-2 or 1099? Churches issue a W-2 to employees at the end of the year reporting wages paid and taxes withheld. Churches issue a 1099 form to self-employed persons who are paid at least $600 during the year. The 1099 form reports compensation paid.
• 941 forms. Churches that are subject to income tax withholding, FICA (social security) taxes, or both, must file Form 941 quarterly. Form 941 reports the number of employees and amount of FICA taxes and withheld income taxes that are payable. No entries are made for self-employed workers, since they are not subject to tax withholding and they do not pay FICA taxes (they pay the self-employment tax).
• Tax withholding. Churches must withhold federal income taxes and the employee’s share of FICA taxes from the wages of nonminister employees. However, churches should not withhold FICA taxes from the wages of nonminister employees if the church filed a timely Form 8274 exempting itself from paying the employer’s share of FICA taxes. Nonminister employees of such a church are treated as self-employed for social security purposes and pay self-employment taxes rather than FICA taxes. Self-employed workers are not subject to federal tax withholding (other than “backup withholding,” which applies if a self-employed worker fails to provide an employer with a social security number). Note that ministers are exempt from income tax withholding even if they are treated as employees–unless they request “voluntary withholding.”
• Treatment of fringe benefits. Some fringe benefits provided by a church to a minister or other church worker are not taxed if the person is an employee. Examples include medical insurance premiums paid by a church on behalf of its minister; group term life insurance (up to $50,000) provided by a church on behalf of a minister; amounts payable to employees on account of sickness, accident, or disability pursuant to an employer financed plan; and employer sponsored “cafeteria plans” which permit employees to choose between receiving cash payments or a variety of fringe benefits.
• Social security. Churches must withhold the employee’s share of FICA taxes from the wages of all nonminister employees (unless, as noted above, the church exempted itself from paying the employer’s share of FICA taxes by filing a Form 8274). Self-employed workers pay their own social security (self-employment) taxes.
Conclusions. Obviously, it is very important for church treasurers to decide if each minister and lay worker is an employee or self-employed. How is this decision made? The United States Tax Court issued an important decision in 1994 that addressed the issue of whether a Methodist minister was an employee or self-employed for federal income tax reporting purposes. Weber v. Commissioner, 104 T.C.—(1994). In reaching its decision that the minister was an employee, the Court announced a new “7-factor” test that church leaders can use to determine whether a worker is an employee or self-employed for federal income tax reporting purposes. The 7 factors are summarized in a table in this newsletter, along with the Court’s analysis of each. Church treasurers will find the table useful in quickly understanding the Court’s new test, and in applying the test to individual ministers and lay church workers.
THE WEBER CASE
TAX COURT’S 7 FACTOR TEST for
DETERMINING THE TAX STATUS OF MINISTERS
| factor | facts suggesting employee status | facts suggesting self-employed | conclusion |
| #1—the degree of control exercised by the employer over the details of the work | (1) less control required over a professional; (2) Methodist ministers are required to perform numerous duties set forth in the Discipline; (3) had to explain the position of the Discipline on any topic he chose to present in his sermons; (4) followed United Methodist theology in his sermons; (5) could not unilaterally discontinue the regular services of a local church; (6) under the itinerant system of the United Methodist Church ministers are appointed by a bishop to their pastoral positions; (7) Methodist ministers cannot establish their own churches; (8) Methodist ministers are bound by the rules stated in the Discipline regarding mandatory retirement at age 70 and involuntary retirement; (9) Methodist ministers cannot transfer to another Annual Conference without permission of a bishop; (10) the Annual Conference limits the amount of leave ministers can take during a year; (11) Methodist ministers are required by the Discipline to be “amenable” to the Annual Conference in the performance of their duties | (1) Rev. Weber scheduled his own activities from day to day and took vacation days without obtaining prior approval; (2) ministers generally do not need day-to-day supervision; (3) Rev. Weber had the right to explain his personal beliefs to his congregation in addition to the position of the Discipline and the United Methodist Church | employee |
| #2—which party invests in the facilities used in the work | (1) local churches provided a home, office, and work facilities for Rev. Weber; (2) local churches bought religious materials used by Rev. Weber in his ministry | (1) Rev. Weber prepared church bulletins at home; (2) Rev. Weber used his own computer for church work; (3) Rev. Weber purchased some of his own vestments; (4) Rev. Weber purchased his own library | employee |
| #3—the opportunity of the individual for profit or loss | (1) Rev. Weber was paid a salary, and provided with a parsonage, a utility expense allowance, and a travel expense allowance from each local church; (2) if Rev. Weber was not assigned to a local church, the Annual Conference would pay him a minimum guaranteed salary, or if he were in special need, the Annual Conference could give him special support; (3) aside from minimal amounts earned for weddings and funerals and amounts spent on utilities and travel, Rev. Weber was not in a position to increase his profit, nor was he at risk for loss | Rev. Weber could not be fired at will | employee |
| #4—whether or not the employer has the right to discharge the individual | (1) the Annual Conference had the right to “try, reprove, suspend, deprive of ministerial office and credentials, expel or acquit, or locate [Rev. Weber] for unacceptability or inefficiency”; (2) the clergy members of the executive session of the Annual Conference had the authority to discipline and fire Rev. Weber | none cited by the court | employee |
| #5—whether the work is part of the employer’s regular business | (1) Rev. Weber’s work is an integral part of the United Methodist Church; (2) a Methodist minister has the responsibility to lead a local church in conformance with the beliefs of the United Methodist Church, to give an account of his or her pastoral ministries to the Annual Conference according to prescribed forms, and to act as the administrative officer for that church | none cited by the court | employee |
| #6—the permanency of the relationship | (1) the relationship between Methodist ministers and the United Methodist Church is “intended to be permanent as opposed to transitory”; (2) Rev. Weber had been ordained since 1978; (3) Rev. Weber is likely to remain a Methodist minister for the remainder of his professional career; (4) the Annual Conference will pay a salary to a minister even when there are no positions with a local church available; (5) ministers are provided with retirement benefits; (6) Rev. Weber did not make his services available to the general public, as would an independent contractor; (7) Rev. Weber works at the local church by the year and not for individuals “by the job” | none cited by the court | employee |
| #7—the relationship the parties believe they are creating | Rev. Weber received many benefits typical of those provided to employees rather than independent contractors, including (1) local church contributions to his pension fund, (2) continuation of salary while on vacation, (3) disability leave and paternity leave, (4) a guaranteed salary if no pastoral position was available, (4) life insurance paid by the local churches, (5) local churches paid 75% of health insurance premiums | (1) Rev. Weber and his employing churches believed that he was self-employed rather than an employee; (2) Rev. Weber received a 1099 rather than a W-2 from the church | employee |
| Conclusions | these factors demonstrated that Rev. Weber was an employee for federal income tax reporting purposes | these factors did not overcome the conclusion that Rev. Weber was an employee for federal income tax reporting purposes |
