Making the distinction as to whether someone in an employment relationship with a church or ministry in Arizona should be considered an employee or an independent contractor requires the consideration of a number of factors.
Sometimes ministries make the decision to label employees as independent contractors in order to save money. But it is not wise to make this choice for that reason.
Those considered “employees” are entitled to the payments their employers are required to make which amount to half of the employee’s total tax payments into Social Security and Medicare (the “payroll taxes” whose potential removal are so much in the news of late), as well as federal income tax and relevant state taxes; and the church must pay unemployment on them as well. Those employed as independent contractors or freelancers, by contrast, pay the entirety of these tax payments from their own paychecks. Naturally, the less costly employment relationship from an employer’s perspective will be the one in which the employer pays less taxes. And it only stands to reason that in the eyes of a hefty percentage of the independent contractor population, the inverse will be true for much the same reason. (Of course there will always be hearty souls who thrive as true independent contractors, whatever the tax situation.)
The concept of “independent contractor” is expected to meet a certain criteria for tax purposes. Among these are:
- Independent contractors must exercise control over the details of their work.
- They must offer have the opportunity for profit or loss.
- They must provide their own tools and materials for performing the job.
- They must be able to set their own hours in which to perform work.
Meanwhile, Arizona puts forth its own state-level test for determining the status of a worker. Known as the “right to control” test, it is based upon the nature of the relationship between the employer, the worker, and the work itself. The more control a worker has over their own environment and the methods they use to accomplish the work, as well as their time schedule, the more likely they are to be considered an independent contractor under law.
Should the IRS determine that an employer has purposely misclassified an employee as an independent contractor, especially if it was done to avoid paying the taxes related to that status, it may find that employer responsible for the tax portions owed by both the employer and the employee, as well as interest and penalties.
Provident Law’s church and nonprofit attorneys are here to answer questions and to aid in establishing the proper form of employer/worker relationship. And we are also available to defend your church should a claim arise. We recognize how essential the missions of nonprofit and religious organizations are for society, and we stand ready to counsel and serve the churches and nonprofit organizations of Arizona. Contact us to learn more.