How to Hire Church Employees the Right Way; Part 2

By Raul Rivera

In Part 1, I covered the five things that need to be done in order to properly hire staff for your church. Keep in mind that I am referring to a person whom the church hires as an employee.

This does not refer to a guest speaker, contractor, or other service provider. Bearing that thought in mind, below is a list of people who, if paid for the work they do for the church, are classified as employees and not self-employed contractors.

Who is an employee; a quick list

1. Senior pastor: Churches often think their pastor is a contractor and should be given a 1099-MISC. That, however, is simply not the case. A pastor is an employee because he/she performs work that is considered a key component of the church, which establishes the relationship component that I mentioned in part 1.

2. Associate pastor: Like a senior pastor, an associate pastor is an employee. Because he/she has to perform work under the guidance of the senior pastor, it meets the behavior component I mentioned last week.

3. Worship leader: A common mistake I see churches make is classifying their worship leader as a contractor. This is especially common when a worship leader serves on a part-time basis. In reality, a worship leader is an employee because the church controls the frequency, the time, and the way in which the service is performed, as well as the location.

4. Other musicians: Hiring musicians to play each week is a great way to build up a quality worship team. Many churches may pay their musicians $50.00 to $100.00 per week to play an instrument on the worship team each Sunday! Believe it or not, this type of scenario makes that musician an employee.

5. Weekly cleaner: If the church hires a cleaning company, then this is a contractor. However, if the church hires an individual, who does it as a part-time service for the church and the church provides the cleaning supplies, then that person is an employee.

6. Weekly nursery workers: In order to provide quality nursery care for toddlers, many churches hire individuals to take care of the toddlers. If this person provides his/her services on a weekly basis like the musician and worship leader, he/she is an employee.

Next steps after you hire

Once the person has been hired, there are many documentation items and reporting requirements that need to be followed carefully. It is super-important to never make a mistake. 

Payroll and timely tax filings can either cause or spare your church a lot of trouble.

Once your church hires employees, there are 2 major responsibilities your church needs to know about:

1. Creating a compensation agreement

Ensure that each individual who works for the church receives a compensation agreement (especially ministers). Compensation agreements typically include information like rights, duration of agreement, job descriptions, conditions of employment, and more.

When your church hires a minister, it is important that when creating his/her compensation agreements you also take time to consider and set-up their housing allowance. In addition, this would be a good time to discuss the self-employment tax exemption with ministers who qualify for this tax benefit.

If you are not sure how to create a compensation agreement then that’s okay. We can help! Give us a call at 877-494-4655 and we’ll be happy to answer any questions you may have!

2. Withholding responsibilities as an employer

There are many requirements and steps that should be followed carefully once an individual has been hired. It’s imperative to get these right because you could cause or spare your church a lot of future headaches.

Below are 6 things that, when done right, bless your church and keep it out of tax trouble.

1. Do not withhold federal, Medicare, and social security taxes on ministers: According to IRS Publication 15-A, the earnings of a minister are not subject to federal income, social security, or Medicare tax withholding. Many churches withhold Medicare and social security taxes on their ministers. By doing so, the church pays 50% of those taxes for him/her, this in turn causes an excess benefit transaction as defined by section 4958 and could result in severe penalties.
2. Withhold federal, Medicare, and social security taxes on all non-ministerial staff:  Unless the church files a timely Form 8274, it is required by law to withhold federal, Medicare, and social security tax on all employees of the church who are not ministers.
3. Deposit withheld taxes: Depending on how much money your church withholds in taxes, federal law requires that all withheld taxes be sent electronically to the IRS on either a daily, biweekly, monthly, or quarterly basis. The IRS requires that the taxes be sent electronically and the easiest way to do it is through a free payment website provided by the Department of the Treasury (eftps.gov). You should enroll even if you do not have any payroll taxes to report. You can do this using your church’s tax-id number (FEIN/EIN). Remember to deposit on time to avoid late filing penalties.
4. File a quarterly Form 941: You will be required to file Form 941 every quarter. The form needs to reflect the grand total of wages subject to federal, Medicare, and social security tax, and how much tax was withheld and sent to the IRS. If your church is only paying the minister, then you may be asked to file Form 944.
5. File annual Form 940: Under the Federal Unemployment Tax Act, if you are a ministry that has not yet acquired its 501(c)(3), you must file an annual Form 940. As a church, you are exempt from having to file this form.
6. File annual Form W-2/W-3: By January 31st of each year, the church must send all of its employees the annual Form W-2 that they need in order to file their personal income tax returns. By the end of February, a copy of the red W-2 and W-3 forms need to be sent to the social security administration.

 (Recommended reading: “Tax Forms You Must Know About”)

Understanding the laws of the land

Imagine a church with a solid internal infrastructure that makes it able to stay right with the laws of the land. Most pastors and church planters do not feel like that could be their church.

We have a vision to see thousands of pastors and church leaders empowered with the knowledge to protect what God has given them to lead all while getting right with the laws of the land. It is fundamental to the discipleship of souls and the growth of the church.

How can we teach others to obey the laws of the land when we (pastors and church leaders) do not take the time to know those laws so that we, too, may obey them?

Related Articles:

• “New Overtime Rules; What This Means for Your Church”
• “3 Common Mistakes Church Make When Paying Pastors”
• “What You Need to Know Before Doing Your Taxes”

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