How to Pay a Contractor, and Form 1099-Misc.

By Raul Rivera

It takes a small army to keep churches going: ushers, greeters, worship teams, children’s ministry volunteers, outreach workers, shuttle drivers, pastors, elders, and the list goes on.

First Timothy 5:17-18 says, “Let the elders who perform the duties of their office well be considered doubly worthy of honor [and of adequate [a]financial support], especially those who labor faithfully in preaching and teaching. For the Scripture says, ‘You shall not muzzle an ox when it is treading out the grain,’ and again, ‘The laborer is worthy of his hire.’” (Amplified Version)

As church leaders, we honor those who serve God’s vision for our churches, and we are grateful to God when our churches’ finances are blessed enough to compensate those who work within our ministries.

When compensating worthy men and women dedicated to carrying out the vision of the ministry, we must also consider the fact that the federal government has guidelines for how to properly compensate these individuals. 

The difficulty in compensating church workers is in knowing how to classify their employment status correctly for tax and legal matters. There are very specific requirements for determining who qualifies as an independent contractor vs. an employee.

Properly classifying a worker’s employment status will help you provide the right tax documents to each worker and avoid serious legal and tax ramifications. Below, we will discuss some useful guidelines that will help you navigate the murky waters of employment classifications and the forms you need to get it right the first time.

In this blog, we will focus on recognizing an independent contractor and the paper filings the IRS requires for these workers.

Recognizing an independent contractor

Independent contractors can do virtually any profession; however, just because you pay them as contractors does not make them contractors. Here are the minimum guidelines to help you properly determine if the person you are paying is an independent contractor.

1. Independent contractors control what type of work they do and how they complete their jobs.

These contractors have full control over the work they do and have the freedom to accept and turn down jobs based on what their work preferences are. If your church has the ability to control the type of work a person does and how he/she does it, then that person is not an independent contractor.

Consider the following example:

ABC Church has purchased a new property and finds they are in need of landscaping and lawn care services to maintain their grounds. They contact a local landscaper who works as an independent contractor. The senior pastor meets with the landscaper to explain the church’s needs, including the landscape designs, their budget, and the frequency of maintenance they would prefer.

The landscaper then provides a quote explaining his pricing for the landscape design, how often he will be able to do maintenance, and the type of maintenance services he will provide based on the church’s price point. The landscaper agrees to provide most tools but requires that the church rent beforehand any large-scale equipment needed.

This example clearly demonstrates that the contractor has control over the terms of his work with the church, whereas if the church were hiring an employee, the church would be able to dictate the job description and hours of the job.

The landscaper has full control over what he charges, his style of maintenance, and how often he can do maintenance work for the church based on his current schedule. He was even able to stipulate what types of equipment he would provide and what types he would not.

2. Independent contractors also determine how much they get paid.

If you hire a worker and set his or her hours, duties, and pay, then you actually have an employee and not an independent contractor.

Independent contractors have the freedom of setting the terms for their pay. For instance, guest speakers at churches may set an honorarium amount for what they may charge to come and preach at churches, conferences, or special events. When you pay these guest speakers, they should be treated as independent contractors.

The simple truth is that a worker is not an independent contractor if your ministry controls the work he/she performs for your ministry. Independent contractors work for themselves and can determine the work they do and how they will accomplish it. They get to decide the terms of their agreement.

3. Contractor positions are not generally considered a key component of the church.

For example, a pastor's job is a key component of the church's existence. Therefore, a pastor is an employee. Many churches incorrectly try to hire him/her as a contractor, and even create a contract to hire him/her as a contractor, only to have the IRS reclassify that individual as an employee in an audit and heftily fine both the church and the pastor.

Below are examples of contractors you may hire to provide services to your church. These are generally people who come to provide specific jobs from time to time, on their own terms, and not for an on-going and consistent basis:

• Landscapers
• Plumbers
• Electricians
• Caterers
• Painters
• Carpenters
• Guest speakers
• Guest singers and musicians
• Web designers
• Accountants

Tax treatment of independent contractors

Your church is not responsible for withholding taxes for independent contractors, but your ministry will still be responsible for maintaining and providing tax forms for these individuals so that they can properly report the income they receive for their taxes.

When you hire an independent contractor, they must fill out Form W-9. The W-9 allows you to record the information necessary to provide the contractor a 1099-MISC for his or her tax reporting. You only need to provided Form 1099_MISC to contractors that your ministry pays $600 or more for that tax year.

Form 1099-MISC should be provided to all contractors by January 31st of the following tax year. For instance, you will send by January 31st of 2015 the 1099-MISC forms pertaining to all contractors who received $600 or more from your ministry in 2014.

The IRS requires you to submit to the IRS a transmittal Form 1096 as a summary of all 1099-MISC forms that your ministry issued for the preceding tax year.

Keep in mind that businesses are not independent contractors. For instance, if you hire Chick-fil-A to cater a business meeting, you do not need to provide a 1099, but if you hire Sister Smith, a fantastic cook at the church, you will provide her a 1099.

Conclusion

Independent contractors provide vital services to ministries and are worthy of their hire. You owe it to them and to your ministry to correctly manage the wages you pay them, to avoid tax law complications in the future.

Each year, we teach hundreds of pastors and ministry leaders how to navigate compensation to contractors at our Ultimate Church Structure conferences. If you want more guidance in this area of compensation management, sign up for one of our conferences today.

Handpicked articles for you:

• "Do You Know How to Classify Your Ministry?"
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• "Court Says Love Offerings are Taxable"

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