Parish Payroll: Are We Doing it Right?

Employee or Independent Contractor?

Before you can know how to treat payments for services, you must first know the business relationship that exists between the church and the person performing the services.

• Employee?
• Independent Contractor?

There are three areas that must be considered to make the proper employee – independent contractor determination.

• Behavioral Control
• Financial Control
• Type of Relationship

Aspects of Behavioral Control

Does the church have the right to direct how the worker does the task? (Employees are generally subject to direction, when, where, and how.)

Consider:

• When and where to do the work
• What tools to use
• What workers to assist them
• Where to purchase supplies
• How the work is to be performed

The key consideration is whether the church as retained the right to control the details of a worker’s performance, or instead has given up the right.

Aspects of Financial Control

Do facts show that the church has the right to control the business aspects of the worker?

• Can the worker realize a profit or loss (contractors can make a profit or loss)
• Does the worker make his/her services available to the market (contractors a generally free to seek out other business opportunities)
• Extent of worker’s investment (contractors typically make significant investment in facilities and equipment)

Type of Relationship

• Is there a written contract describing the business relationship?
• Is the worker provided with benefits by the church? (e.g., Pension, Health Insurance, Vacation Pay, Sick Pay)
• What is the expected duration of the business relationship? (contracts generally specify a finite time period or are limited to a specific project, whereas employees are usually hired indefinitely)

Employment Tax and Benefits Requirements

Remittance and Reporting Requirements

What is income?

• Salary and wages
• Allowances
  • Housing equity
  • Social security (clergy) tax paid or reimbursed by church
  • Cell phone (if no Accountable Reimbursement Plan)
  • Travel (if no Accountable Reimbursement Plan)
• Parish payment of personal or family expenses
• Payment for “nonqualified” moving expense
  • Not meeting requirement of accountable reimbursement plan
  • Move to location less than 50 miles+prior commute miles
• Gifts to employees (function of employment)
• Value of personal use (incl. commute) of parish owned vehicle
• Life insurance in excess of IRS limits ($50,000)
• Below market interest rates on loans or loan forgiveness
• Medical Expense reimbursements (except under a self-insured plan, subject to conditions)
• Retirement purse (if gifts made through parish)

What Isn't Income?

• Housing Allowance (clergy only, subject to self-employment tax only) requirements:
  • Compensation for ministerial services
  • Used to pay expenses (primary residence)
  • Not exceed fair market value (furnished+utilities)
  • Authorized by vestry resolution in advance
• Rectory (church owned)
• Amounts received for weddings/funerals or honoraria
  • Excluded only if there is a written agreement that employee is “NOT allowed to receive such income” AND check is written to the parish.
• Payment under an Accountable Reimbursement Plan (clergy and lay)
• Personal Retirement Savings (403b) salary reduction plan (subject to limits)
• Section125 plan – pretax deductions for medical and child care (requires administration)
• Section 106 plan – medical insurance premium reimbursement (requires agreement)

Section 106 plan

• Written agreement with employer
  • I _______, enter into an agreement with _____ to reimburse me for premiums paid for medical, dental, LT care, Medicare from a reduction in my compensation of $____
  • I agree to provide receipts to my employer and understand that reimbursement will not occur until receipts have been received

Employers are subject to penalties by the IRS for failure to report income, or incomplete reporting of income

IRS penalties – Excise Tax

• “Intermediate sanctions” on Excess Benefit Transactions

  Section 4958 imposes an excise tax on excess benefit transactions between a disqualified person and an applicable tax-exempt organization. The disqualified person who benefits from an excess benefit transaction is liable for the excise tax. An organization manager may also be liable for an excise tax on the excess benefit transaction.

• Applied to recipient (usually rector) and in some cases vestry members
• “Automatic” regardless of amount, if use church assets (vehicles, homes, credit cards, computers, cell phones, etc.) for personal purposes or receive non-accountable (not documented) expense reimbursements, unless such benefits are reported as taxable income.
• 200% of unreported income, plus interest and penalties, plus a fine of up to $10,000 to individual members of vestries

Model Policies and Resolutions

• Accountable Reimbursement Plan
• Parish Credit Card
• Housing Allowance resolution
• Continuing education or Sabbatical expenses – not meeting requirements of reimbursable plan

Resources

• CPG payroll project
• Church & Clergy Tax Guide
• 2009 Tax Guide for Episcopal Ministers & Churches – Church Pension Fund
  • www.irs.gov/formspubs/index.html
• www.ChurchLawToday.com

Extracted from a presentation given by Fred Snowden and Darrell Knapp at the 2006 Bishop’s College for Parish Leadership.