Churches are notorious for improperly classifying people who work for them. Too often, churches take what they consider to be the easy road and classify workers as independent contractors, rather than as employees. If a worker is an independent contractor, the church simply has to pay a fixed price for the work performed. No payroll taxes (FICA – Social Security taxes and Medicare taxes) are owed on an independent contractor, where conversely, such taxes would be owed if the worker was considered an employee. Further, an independent contractor only has to receive a Form 1099, while an employee must be provided a Form W-2 annually.
In an effort to simplify their payroll, churches often self-determine that their workers are self-employed, independent contractors rather than employees. In many situations, the church’s designation is wrong. To determine if the worker is an independent contractor or an employee, the Internal Revenue Service will look at the issue of control. Who controls the worker’s actions? If it looks like the church sets the time the worker is to perform his or her tasks, provides the tools for the worker to perform those tasks, and provides instructions on how those tasks are to be performed, it is most likely that the worker will be considered an employee, simply because the church controls the work environment.
Some churches realize that they have improperly classified workers as self-employed when in reality they are employees, but they are afraid to reclassify them primarily because they believe that reclassification will raise a “red flag” to the Internal Revenue Service. To help eliminate this quandary, the IRS has recently announced their “Fresh Start” initiative. This program will allow employers, including churches, the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.
To be eligible, an applicant must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers
Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
According to the Internal Revenue Service, employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years.
Churches that believe their workers are misclassified should consider using this Fresh Start initiative. However, it should only be considered after consultation with a knowledgeable certified public accountant or lawyer.
Full details on the new Voluntary Classification Settlement Program can be found in IRS Announcement 2011-64.