Who is an Independent Contractor for a Nonprofit or Church?
As the end of January approaches, there is still so much to do with the accounting records. It is time to get the IRS required 1099s to the vendors whom we paid throughout the year. For each non-incorporated vendor whom your organization paid over $600/year, Forms 1099 Misc. are required to be submitted to the IRS. Copies of these forms must be sent to the vendors by the end of January. The IRS must receive a transmittal (Form 1096) and the 1099s by the end of February.
The most difficult part of the 1099s is determining who should receive them. The IRS assumes individuals working for the organization are employees unless proven otherwise. When auditing an organization, they have a list of 20 questions to determine if the worker is an independent contractor or not.
In case you are wondering why it matters, income tax and payroll taxes are withheld on employees but not independent contractors.Independent contractors have to pay the full (employee and employer) Social Security and Medicare taxes on their earnings. The IRS is concerned that businesses may classify workers as independent contractors to save on the additional employer payroll taxes.
The IRS gives some guidance on their website to help you determinewho is an independent contractor.
Facts that provide evidence of the degree of control and independence fall into three categories:
1.Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2.Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3.Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
For a church, the following are some examples of contractors and employees from my book, Church Accounting The How-To Guide for Small & Growing Churches.
Revival ministers, supply preachers and guest speakers are usually classified as independent contractors and should be issued a 1099 if the total paid to them in the year was over $600.
For each person you determine is an independent contractor, you must have on file Form W-9 Request for Taxpayer Identification Number and Certification. This is the form that the vendor fills out with his address and SSN or business EIN. Your church or nonprofit uses this information to complete the 1099s.
If you realize that you should have been paying the person as an employee instead of an independent contractor, you will need to revise your 941 and pay the employment taxes due. Please note the IRS website states, "An EO can be held liable for employment taxes, plus interest and penalties, if a worker is incorrectly classified as an independent contractor." So if you are unsure, play it safe by treating the person as an employee.
I hope that helps clarify some of the confusion over who is an independent contractor. In the next few weeks, I'll be cover what to look for in a new accounting system and some different ways to set up pledges for a new year.