We recently asked church leaders about the following situation:
As the pastor, when wedding season at your church peaks youre pleased that you can call on people like your churchs wedding coordinator, church custodian and sound technician to lend a hand. But youre not sure if the church should consider them to be independent contractors.
Payroll errors present one of the greatest liabilities for churches. One of the most common payroll errors involves the misclassification of workers. (CLICK HERE for our article that explains why most workers that churches consider independent contractors, the IRS consider employees.)
Since in the past, voluntarily correcting an employees misclassification legally has been expensive, many churches chose to not do anything. Despite the high cost of voluntarily correcting classification issues, things are even worse if the IRS or a state agency shows up on a churchs doorstep and institutes the reclassification of workers and assesses back payroll taxes and penalties.
Fortunately in 2012 the IRS created a voluntary compliance program that allows employers, including churches, to reclassify their workers for federal employment tax purposes. The program is the Voluntary Classification Settlement Program or VCSP. If a church has been misclassifying some of its workers, say a musician or a wedding coordinator, or a nursery worker or even a sound technician, now there is an avenue to legally re-classify them correctly and at a considerable savings over what was available previously.
Okay, we know that everyone is enthusiastically cheering right about now, but lets take a moment and get the cold water out of the way so that we can go back to cheering. In order to participate in the program, a church must meet certain eligibility requirements, apply to participate in VCSP, and enter into a closing agreement with the IRS.
First, lets review the eligibility requirements:
If a church meets the eligibility requirements and wishes to participate in the VCSP, it must file a Form 8952 at least 60 days prior to the start of the quarter it wishes its non-employees to start being classified as employees. Perhaps the following table might help keep the dates straight:
Once the IRS has accepted the churchs application for re-classification, it will present the church with a closing agreement. The closing agreement will require the payment of the fees as calculated on the Form 8952 (generally 1.3 percent of the annual wages paid) as well as an agreement to extend the statute of limitations for the first three years of participation in the VSCP from the usual three years to six years. In turn, the IRS will agree not to audit the church on payroll taxes related to the workers included on your Form 8952 for prior years.
Understand that the IRS says that agreeing to the extension of the statue of limitations in the closing agreement is voluntary. But, if your church wont agree to it, it wont be allowed to participate in the program.
Nevertheless, the two big incentives for churches to participate are having a legal way to resolve the issue of employee classification with the IRS, and resolving the issue at a cost that is considerably less than exists otherwise. Recently the IRS announced a additional short-term incentive. Through June 30, 2013, it will waive the requirement that 1099s were issued for affected workers by their employers.
So you may ask, Is the IRS going soft? As key implementers of much of the recent changes in healthcare law, we believe that they are just trying to lighten the considerable additions to their workload that they see headed their way.
Rules under the new Affordable Care Act (ACA) hinge significantly on how many employees an employer has. Since independent contractors arent counted as employees, some employers might be tempted to evade compliance with the ACA by misclassifying workers as independent contractors. As a result the IRS can be expected to ramp up enforcement in this area as part of their responsibilities in implementing the ACA. And since they already have been offering something very close to amnesty via the VCSP, their tolerance for violators could be very low.
If your church has been classifying its musicians, wedding coordinator, sound technicians, nursery workers or other occasional duty workers as independent contractors, your opportunity to legally classify them properly could slip away before you realize it. While the VCSP is available for now, the IRS hasnt said how long the program will continue to be available. The VCSP is an excellent opportunity for your church to demonstrate its integrity in how it handles payroll. We recommend that a careful review of a churchs workers currently classified as independent contractors be performed and, where appropriate, the church take advantage of the VCSP without delay.
If you need assistance in reviewing those youve classified as independent contractors or in completing your Form 8952, please contact us. We can help.
Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.