The question whether your church should withhold your minister’s income tax depends on whether your minister is considered an employee of your church or an independent contractor. The answer to this question is important because a church is required by law to withhold income taxes from its employees while independent contractors are considered self-employed and withhold and pay their own taxes.
The federal courts and the IRS have considered the issue of whether ministers are employees or self-employed in a number of cases through the years. Different test have been considered and adopted in these case. One leading case,Weber v. Commissioner, in 1995 adopted a seven-factor test that considers (1) the degree of control exercised by the employer over the details of the work; (2) which party invests in the facilities used in the work; (3) the opportunity of the individual for profit or loss; (4) whether the employer has the right to discharge the individual; (5) whether the work is part of the employer’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believe they are creating.
One IRS ruling applied a 20-factor test to determine who is an employee and who is an independent contractor. Another applied a basic “common law” test that generally looks at the right of a church to control the minister. Regardless of the various tests, the outcome in most of these cases was that the minister was considered an employee. Most ministers will be considered employees of the church, therefore the church should withhold a minister’s income tax and otherwise treat the minister as an employee.
This is just a general overview. If you need assistance regarding whether a minister is treated as an employee or an independent contractor in your church’s situation, we can help. Provident Law’s church and nonprofit attorneys are here to answer questions and to aid in establishing and crafting policies governing church activities and benefits. We recognize how essential the missions of religious organizations are for society, and we stand ready to counsel and serve the churches of Arizona. Contact us to learn more.