Church & Clergy Tax Guide

Introduction

Whether a minister or other church staff member is an employee or self-employed is an important question. Unfortunately, it also can be a complex and confusing one. This chapter addresses this question on the basis of the most recent precedent. The focus of this chapter will be on the correct reporting status of ministers and nonminister staff members for federal income tax reporting purposes. The correct reporting status of these individuals for Social Security purposes is also addressed in this chapter but is addressed more fully under “Ministers Deemed Self-Employed” on page  and “The 10-step approach to compliance with federal payroll tax reporting rules” on page .

Reporting compensation

Employees report their compensation directly on Form 1040 (line 1—wages) and cannot deduct unreimbursed (and nonaccountable reimbursed) business expenses. Self-employed persons report compensation and business expenses on Schedule C.

Adjusted gross income (AGI)

Ordinarily, AGI will be higher if a minister reports income taxes as an employee, since unreimbursed and nonaccountable reimbursed business expenses are no longer deductions from AGI. Self-employed persons can deduct business expenses in computing AGI. AGI is important for many reasons. For example, the percentage limitations applicable to charitable contributions and medical expense deductions are tied to AGI.

Form W-2 or Form 1099-NEC?

Ministers working for a church or church agency should receive a Form W-2 each year if they are employees, and a Form 1099-NEC if they are self-employed (and receive at least $600 in compensation).

Tax-deferred annuities

Favorable tax-deferred annuities (also known as 403(b) annuities) offered by nonprofit organizations (including churches) may only be available to employees. This issue is addressed under “Eligible employees” on page .

Tax treatment of various fringe benefits

Some employer-provided fringe benefits are nontaxable only for employees. Examples include group term life insurance (up to $50,000) provided by a church on behalf of a minister and employer-sponsored “cafeteria plans” that permit employees to choose between receiving cash payments or a variety of fringe benefits.

Audit risk

Self-employed persons face a higher risk of having their tax returns audited. Why? IRS data reveals that the voluntary reporting percentage (i.e., persons who voluntarily report the correct amount of income) is far greater for employees covered by mandatory income tax withholding. As a result, the IRS scrutinizes the tax returns of self-employed persons (who are not subject to tax withholding) more closely than those of employees.

Consequences of being reclassified as an employee

Many persons who report their income taxes as self-employed deduct their unreimbursed (and nonaccountable reimbursed) business expenses as a deduction on Schedule C. If they are reclassified by the IRS as employees, they lose a tax deduction for these expenses.

EXAMPLE Pastor C reports his income taxes as self-employed. In 2024 he incurs $4,000 in business expenses that are not reimbursed by his church. In the past, Pastor C has deducted his business expenses on Schedule C. In 2024 he is audited by the IRS and reclassified as an employee. One result of this reclassification is that Pastor C’s unreimbursed business expenses are not deductible as itemized expenses on Schedule A.

The primary disadvantage of employee status is that unreimbursed (and nonaccountable reimbursed) business expenses are no longer deductible as itemized deductions on Schedule A. As noted under “Accountable reimbursed expenses” on page , this disadvantage can be overcome if an employer adopts an “accountable” reimbursement plan under which the employer reimburses employees only for those business expenses for which the employee provides timely and adequate substantiation. 

Table 2-1 summarizes the main differences between employee and self-employed status.

The IRS and the courts have applied a variety of tests to determine whether a particular worker is an employee or self-employed for income tax reporting purposes. These include the following:

Each of these tests is summarized below.

Test 1—the common-law employee test

The income tax regulations contain the following common-law employee test for determining whether a worker is an employee or self-employed. This test is used frequently by the IRS and the courts.

Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.

The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee. Generally, physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business, or profession in which they offer their services to the public are not employees. Treas. Reg. 31.3401(c)-1(b). See also IRS Publication 517.

In Publication 15-A, the IRS notes that “in any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.” It then addresses three factors to be considered in applying the common-law employee test: behavioral control, financial control, and the relationship of the parties:

(1) Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

Instructions that the business gives to the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

(2) Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:

The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer.

The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

(3) Type of relationship. Facts that show the parties’ type of relationship include:

Test 2—the IRS 20-factor test

The IRS has developed a list of 20 factors to be used “as an aid in determining whether an individual is an employee under the common law rules.” Revenue Ruling 87-41. There is considerable overlap between these 20 factors and the several factors enumerated by the IRS in describing the more recent common-law employee test (see above). In most cases, a worker’s status will be the same under both tests.

The 20 factors were “developed based on an examination of cases and rulings considering whether an individual is an employee.” The IRS cautioned that “[t]he degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed” and that “if the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial.”

The 20 factors are listed in Table 2-2. Ministers who report their income taxes as self-employed should carefully consider these factors to determine if they have a substantial basis for reporting as self-employed. The same is true of any lay church workers who are treated as self-employed for income tax reporting purposes.

Another factor, not mentioned in the IRS 20-factor test, is the parties’ own characterization of their relationship. For example, if a church and its minister enter into a written contract that specifically characterizes the minister as self-employed, this would be an additional factor to consider.

Illustration 2-1 presents a clause that may be used by a church wishing to characterize its minister as self-employed rather than as an employee. The clause could be inserted in the contract of employment or simply adopted as a resolution by the church board and included in the board’s official minutes. Keep in mind that such a clause by itself, as the IRS observed in Revenue Ruling 87-41, will have little, if any, relevance and will never result in a minister being characterized as self-employed if he or she fails the common-law employee test or would be an employee under the 20-factor test. It is merely one fact that will be considered.

Test 3—the Tax Court’s seven-factor test

In 1994 the United States Tax Court issued two rulings addressing the correct tax reporting status of ministers. In one case the court found that a Methodist minister was an employee for federal income tax reporting purposes. Weber v. Commissioner, 103 T.C. 378 (1994), aff’d, 60 F.3d 1104 (4th Cir. 1995). In the second case the court concluded that a Pentecostal Holiness pastor was self-employed for income tax reporting purposes. Shelley v. Commissioner, T.C. Memo. 1994-432 (1994). These cases are summarized later in this section. While the court reached different conclusions in these two cases, it applied the same test for determining the correct tax status of ministers. The test, along with an explanation of each factor, is set forth in Table 2-3.

The court made two additional points that should be considered in applying this test: (1) “No one factor dictates the outcome. Rather, we must look at all the facts and circumstances of each case.” (2) “The threshold level of control necessary to find employee status is generally lower when applied to professional services than when applied to nonprofessional services.”

Test 4—the Supreme Court’s 12-factor test

In 1992 the Supreme Court listed 12 factors to be considered in deciding whether a worker is an employee or self-employed. Nationwide Mutual Insurance Company v. Darden, 503 U.S. 318 (1992). The Court observed that each factor must be considered and that none is decisive. The 12 factors, along with an explanation of whether they support employee or self-employed status, are summarized in Table 2-4.

Test 5—the corporate-officer test

The income tax regulations specify:

The term “employee” includes every individual performing services if the relationship between him and the person for whom he performs such services is the legal relationship of employer and employee. . . . ​Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is not considered to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation. Treas. Reg. 31.3401(c)-1.

Similarly, IRS Publication 15-A states: “For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. A director of a corporation is not an employee with respect to services performed as a director.”

Six court decisions have addressed the question of whether a minister is an employee or self-employed for federal income tax reporting purposes. These cases are discussed below, and they are summarized in the Appendix on page .

Case 1—Ungvar v. Commissioner, T.C. Memo. 2013-161 (2013)

The U.S. Tax Court ruled that a rabbi was not an employee of a synagogue, and therefore the synagogue was not liable for tens of thousands of dollars in penalties for failing to withhold Social Security and income taxes.

A religious organization was incorporated to operate a synagogue. It paid a rabbi annual amounts ranging from $30,000 to $100,000 from 2004 to 2007. None of these amounts were reported as employee compensation, and so no FICA taxes or income taxes were withheld. The IRS audited the rabbi, determined that he was an employee, and assessed penalties (under section 6651 of the tax code) of more than $100,000 against the synagogue for failing to withhold and pay $95,000 in FICA taxes and $162,145 in federal income taxes. The synagogue appealed to the Tax Court, claiming that the rabbi was an independent contractor rather than an employee, and so no taxes had to be withheld from his compensation.

The Tax Court began its opinion by noting: “Employers and employees are subject to employment taxes, including FICA. FICA provides a Social Security tax payable by both employers and employees. Employers are required to withhold FICA tax and federal income tax on wage payments that they make to their employees. These employment taxes do not apply to payments made to independent contractors.”

In resolving the rabbi’s status, the court relied on a seven-step analysis it had adopted in the Weber case summarized below. Weber v. Commissioner, 103 T.C. 378 (1994), aff’d 60 F.3d 1104 (4th Cir. 1995). The court noted:

Whether an individual performing services for a principal is an employee (rather than an independent contractor) is a factual question to which common law principles apply. . . . ​In determining whether a worker is an employee, the court considers (1) the degree of control exercised by the principal over the details of the work; (2) which party invests in the facilities used by the worker; (3) the opportunity of the worker for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating. . . . ​We consider all facts and circumstances; no one factor dictates the outcome. Although the determination of employee status is to be made by common law concepts, a realistic interpretation of the term “employee” should be adopted, and doubtful questions should be resolved in favor of employment in order to accomplish the remedial purposes of the legislation involved.

The Tax Court concluded, on the basis of its examination of each of these seven factors, that the rabbi was an independent contractor rather than an employee, and so the synagogue was not required to withhold FICA taxes or income taxes from his compensation.

Case 2—Radde v. Commissioner, T.C. Memo. 1997-490 (1997)

In 1997 the Tax Court ruled that a Methodist minister was an employee rather than self-employed for income tax reporting purposes. The court applied the same seven-factor test it used in the Weber case (see below) and concluded that there was no basis for distinguishing between the two cases. The minister in question had served as both a senior pastor and a denominational official for the years under audit.

Case 3—Alford v. United States, 116 F.3d 334
(8^th Cir. 1997)

A federal appeals court ruled that an Assemblies of God minister was self-employed rather than an employee for federal income tax reporting purposes. The court used a 12-factor test in reaching this result that was announced by the United States Supreme Court in 1992 (summarized in Table 2-4).

The facts of the case can be quickly summarized. Pastor James Alford was an ordained Assemblies of God minister who served as pastor of an Assemblies of God church in Hampton, Arkansas, for several years. He reported his income taxes as a self-employed person while serving as pastor of the church. The IRS audited Pastor Alford’s 1986, 1987, and 1988 tax returns and determined that he should have reported his income taxes as an employee rather than as self-employed. As a result, all of Pastor Alford’s business expenses were shifted from Schedule C to Schedule A and were deductible only to the extent they exceeded 2 percent of his AGI.

Pastor Alford paid the additional taxes assessed by the IRS and then filed a lawsuit in a federal district court in Arkansas, seeking a refund. The district court rejected Pastor Alford’s request for a refund. It agreed with the IRS that he was an employee and that the IRS had correctly assessed the additional taxes. The district court concluded, however, that Pastor Alford was not an employee of the local Arkansas church that he served. But it found that “an extremely close relationship exists” among the national and regional Assemblies of God agencies and the local church that Pastor Alford served and that “the control exercised by each of them should be considered together.” The district court concluded that Pastor Alford was an employee because of the “significant control by [his church] through its supervision by the District Council and the National Church, over the manner in which [he] performed his work.”

Pastor Alford appealed the district court’s ruling to the eighth circuit court of appeals (its decisions are binding in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota). The court reversed the district court’s decision and concluded that Pastor Alford was self-employed rather than an employee for income tax reporting purposes. As a result, it ordered the IRS to refund to Pastor Alford the additional taxes he paid because of the erroneous decision by the IRS that he was an employee.

Was Pastor Alford an employee of his local church?

The court began its opinion by selecting the test to apply in deciding whether Pastor Alford was an employee or self-employed. It adopted a test set forth in a Supreme Court decision in 1992:

[Besides considering] the hiring party’s right to control the manner and means by which the product is accomplished, [a court must also look at] the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; [and] the provision of employee benefits. Nationwide Mutual Insurance Company v. Darden, 503 U.S. 318 (1992).

The Supreme Court clarified that “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”

The appeals court concluded, on the basis of this test, that Pastor Alford was not an employee of the local church he served:

We begin our analysis with Alford’s relationship with the Hampton Church. Alford was pastor at the church for a total of about ten years. The local church hired Alford and paid him a salary of $24,400 in 1986, $23,425 in 1987, and $22,100 in 1988. The salary was negotiated by Alford and the church and, although it was not calculated as a percentage of the revenues of the Hampton Church, it was dependent in part upon local church revenue. The church paid Alford a $4000 housing allowance and he did not pay rent when he lived in the parsonage. The church paid Alford an additional $250 each quarter so that he could pay his Social Security taxes; paid for his health insurance; paid into a retirement fund set up by the national church; and provided Alford a credit card for gasoline, on which he charged up to $520 a year. He received an annual $750 Christmas gift from the congregation, in addition to his salary. The church provided a desk, chair, and copy machine for the pastor’s use, but Alford used his own desk and chairs, and in addition provided and used for the benefit of the church his own car, typewriter, computer, and library. Alford signed a contract with the church and paid his own self-employment taxes.

For the most part, Alford set his own schedule (except of course for regularly scheduled church services). He was free to perform weddings, funerals, and revivals for a fee, and was not required to pay over any of the fees to the church. He was not expected to pay for a substitute pastor if one was necessary. Alford arranged for evangelists or special speakers at the Hampton Church, and contributed to special collections taken for them.

Was Pastor Alford an employee of the combination of his local, regional, and national churches?

The IRS conceded that Pastor Alford was not an employee of his local church. But it insisted that he was an employee of the combination of the local, regional, and national churches. The trial court agreed on the grounds that “an extremely close relationship exists” among the local, regional, and national church entities, and “thus, the control exercised by each of them should be considered together.” The trial court concluded that Pastor Alford was an employee because of the “significant control by the Hampton Church, through its supervision by the District Council and the National Church, over the manner in which [he] performed his work.”

The appeals court rejected the conclusion of both the IRS and the trial court that the authority of the local, regional, and national church bodies over Pastor Alford should be combined. The court concluded:

Perhaps more telling in this case are the aspects of Alford’s work for the Hampton Church that the General and District Councils had no right to control during the years in question. They did not locate the job at the Hampton Church for Alford nor could they have “placed” him as pastor there. They did not and could not have negotiated his salary and benefits. They could neither have guaranteed him a job (with the Hampton Church or any other local church) nor could they have guaranteed his salary. The regional and national churches could not have fired him from the job as pastor of the Hampton Church (although if he had lost his credentials the Hampton Church would have lost its affiliate status if it had kept him on as pastor). They could not have required him to retire. They did not observe or grade his performance at the Hampton Church to determine if his credentials should be renewed, nor did they regularly evaluate him. Clearly the national and regional entities had little if any control over—or right to control—the “manner and means” Alford employed in accomplishing his duties as pastor at the Hampton Church during 1986, 1987, and 1988.

The court concluded that “the General and District Councils’ right to control Alford, in combination with the common law agency factors present in Alford’s relationship with the Hampton Church that weigh in favor of employee status, do not suffice to render Alford an employee within the meaning of the relevant provisions of the tax code.”

The Alford case ensures that the correct reporting status of ministers for income tax purposes will remain ambiguous.

Table 2-5 summarizes the court’s analysis in this case.

Binding precedent. The court’s decision will be binding only in the eighth federal circuit, which covers the following states: Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. The decision will be persuasive, but not binding, elsewhere.

Application to multistaff churches. Perhaps the most significant fact in the Alford case was that Pastor Alford was the only employee of a small church. Under such circumstances, a minister often will have a greater degree of autonomy and be subject to less control by the church. It is doubtful that ministers in larger churches employing several full-time staff members will be able to support self-employed status on the basis of the Alford decision.

Case 4—Greene v. Commissioner, T.C. Memo. 1996-531 (1996)

In 1996 the Tax Court ruled that an Assemblies of God foreign missionary who resided in Bangladesh was self-employed rather than an employee for federal income tax reporting purposes. The court listed eight factors to be considered in deciding whether a worker is an employee or self-employed for federal income tax reporting purposes:

(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 taxpayer’s opportunity for profit or loss; (4) the permanency of the relationship; (5) the [employer’s] right of discharge; (6) whether the work performed is an integral part of the [employer’s] business; (7) what relationship the parties believe they are creating; and (8) the provision of benefits typical of those provided to employees. No one factor is determinative; rather, all the incidents of the relationship must be weighed and assessed.

Factor 1—degree of control

The court noted that an employer’s right to control the manner in which a person’s work is performed “is ordinarily the single most important factor” in determining whether that person is an employee. The more control, the more likely the worker is an employee. The court mentioned three additional factors to be considered in applying this test: (1) a sufficient degree of control for employee status does not require the employer to “stand over the taxpayer and direct every move made by that person”; (2) “[t]he degree of control necessary to find employee status varies according to the nature of the services provided”; and (3) “[w]e must consider not only what actual control is exercised, but also what right of control exists as a practical matter.”

Facts indicating control. The IRS insisted that the following facts demonstrated a sufficient degree of control for the missionary to be considered an employee:

Facts indicating a lack of control. The court pointed to the following facts in concluding that insufficient control was exercised over the missionary to treat him as an employee:

The Tax Court noted that the missionary’s circumstances in this case “are very different” from those of a pastor of a local church:

[The taxpayer in this case] was employed as a foreign missionary, not a pastor. We think that the National Church’s authority over the manner in which a pastor performs his or her duties is not highly probative in analyzing the National Church’s control over the daily activities of a foreign missionary. This is because pastoring a local church and engaging in foreign mission work are two different jobs involving different qualifications, duties, and bodies of authority. Pastors are subject to the controls of a local church whereas missionaries are subject to the authority of the DFM. As previously discussed, the DFM exerted very little control over petitioner.

The court concluded:

In summary, the DFM lacked the control and lacked the right to control the manner and means by which [the taxpayer] performed his duties as a foreign missionary. Rather, the DFM facilitates foreign ministry by processing a missionary’s collections and pledges and providing useful information to missionaries through the missions manual and a proposed foreign living budget. In other words, we view the DFM as a service provider relieving endorsed missionaries from the administrative burdens of collecting and processing their pledges and obtaining information regarding their country of service.

Factor 2—investment in facilities and equipment

The second factor in the Tax Court’s eight-factor test is which party invests in the facilities used in the work. If the employer invests in the facilities, it is more likely that the worker is an employee. The court observed:

[The taxpayer’s] sole compensation as a missionary was in the form of a “personal allowance” secured from funds that he raised during his deputational ministry. In this regard, we observe that if a donor fails to remit a pledged amount, the DFM makes no effort to contact the donor, much less obtain the donation. Additionally, the National Church does not guarantee missionaries minimum compensation or support. [The taxpayer] used his personal car and telephone to raise funds during his deputational ministry. [He] occasionally hired assistants at his own discretion and accepted responsibility for paying those assistants.

The IRS pointed out that the missionary was reimbursed for his expenses when he withheld costs from the offerings remitted to the DFM. The court did not find this relevant: “Even if [he] were regarded as receiving reimbursement for his expenses, this matter is more than outweighed by other evidence probative of his being an independent contractor, e.g., petitioner’s efforts in securing the funding for his foreign ministry and his investment in his automobile and telephone.” The court concluded that the second factor supported self-employed status.

Factor 3—opportunity for profit or loss

The third factor in the Tax Court’s eight-factor test is the taxpayer’s opportunity for profit or loss. The court noted that the National Church does not guarantee missionaries minimum compensation. Rather, compensation received by missionaries is in the form of a personal allowance, the amount of which depends on the total amount of funding that missionaries are able to secure during their deputational ministry. Additionally, upon resignation, missionaries forfeit any account balance they may have with the DFM and must reallocate their funds to another ministry. The court concluded that the third factor supported self-employed status.

Factor 4—permanency of the relationship

The fourth factor in the Tax Court’s eight-factor test is the permanency of the relationship. The more permanent the relationship, the more likely the individual is an employee. The taxpayer conceded that missionary service is a lifetime career. Therefore, the court concluded that the fourth factor supported employee status.

Factor 5—the DFM’s right of discharge

The fifth factor in the Tax Court’s eight-factor test is whether the employer has the right to discharge the worker. If such a right exists, it is more likely that the worker is an employee. The court noted that the DFM did not have the power to prevent the taxpayer from serving as an Assemblies of God missionary in Bangladesh: “The DFM’s most extreme form of discipline is the withdrawal of a missionary’s endorsement. For a missionary, the practical consequence of losing the DFM’s endorsement is one of administrative inconvenience, namely, that the missionary must collect and process pledges without the assistance of the DFM. In any event, unendorsed Assemblies of God missionaries can and do serve in the foreign field.”

The IRS insisted that because the missionary is an Assemblies of God minister, the National Church has the right to revoke his ministerial credentials, and therefore the National Church can effectively discharge him. The court disagreed:

Indeed, the credentials committee [of the National Church] has the authority to withdraw the approval and recommend the recall of ministerial credentials. Although [the taxpayer] is an Assemblies of God minister subject to the disciplinary proceedings in the constitution and bylaws, he presently serves in the capacity of a foreign missionary. Thus, we think the more appropriate analysis considers the DFM’s right to discharge [him] in his capacity as a missionary, rather than the National Church’s right to recall [his] ministerial credentials.

The court concluded that the fifth factor supported self-employed status.

Factor 6—integral part of business

The sixth factor in the Tax Court’s eight-factor test is whether the work performed is an integral part of the employer’s business. The court noted that the DFM’s primary mission is world evangelism and that the taxpayer’s work as an Assemblies of God missionary was directly related to the accomplishment of that mission. Therefore, the court concluded that the sixth factor supported employee status.

Factor 7—relationship the parties believe they have created

The seventh factor in the Tax Court’s eight-factor test is the relationship the parties believe they have created. That is, did the DFM and its missionaries believe their relationship was that of employer and employees, or did they believe their relationship was that of an employer and self-employed workers? The court concluded that the parties believed that missionaries were self-employed, based on the following factors: (1) the financial comptroller of the DFM testified that the DFM considered its missionaries to be self-employed; (2) the National Church issued the taxpayer a Form 1099-MISC each year reflecting nonemployee compensation for services rendered; (3) federal income tax was not withheld from the missionary’s compensation (the court apparently was unaware of the fact that the compensation of ministers and missionaries is exempt from federal income tax withholding whether they report their income taxes as employees or as self-employed); and (4) the taxpayer thought he was self-employed, as evidenced by the fact that he reported his foreign ministry income and expenses on Schedule C. The court concluded that the seventh factor supported self-employed status.

Factor 8—employee-type benefits

The last factor in the Tax Court’s eight-factor test is whether the employer provides employee-type benefits to the worker. The court noted that the DFM provided its missionaries with the following fringe benefits: (1) access to the National Church’s retirement plan, and (2) access to the National Church’s health insurance plan. On the other hand, the DFM has no policy regarding sick leave and does not maintain records reflecting either vacation or sick leave taken by missionaries. The court concluded that “although the matter is not free from doubt, we think that these facts support a finding that [the taxpayer] was an employee, not [self-employed].”

The court concluded its analysis of the eight factors by observing:

Some aspects of the relationship between [the missionary] and the National Church indicate that [he] was an employee, whereas other aspects of the relationship indicate that he was [self-employed]. After weighing the above factors, giving particular weight to the lack of control and the lack of the right to control that the National Church and the DFM had over endorsed missionaries, we conclude that [the taxpayer] was [self-employed], and not an employee.

Case 5—Weber v. Commissioner, 103 T.C. 378 (1994), affirmed, 60 F.3d 1104 (4^th Cir. 1995)

The Tax Court concluded that a Methodist minister was an employee and not self-employed for federal income tax reporting purposes. The court began its opinion by asserting that Pastor Weber, “a United Methodist Minister, is an employee for federal income tax purposes.” What factors led the court to reach this conclusion, and how will the ruling affect other ministers? These are critical questions.

The court noted that Pastor Weber had the burden of proving that he was self-employed for federal income tax purposes and not an employee. The court conceded that the tax code contains no definition of the term employee. Whether an employer–employee relationship exists in a particular situation “is a factual question” to be decided on a case-by-case basis. How is this determination made? The court referred to common-law rules that are applied in making such a decision. These common-law rules are set forth in the income tax regulations and also in court decisions. The court quoted the income tax regulations’ definition of an employer–employee relationship (noted above as “Test 1—the common-law employee test”).

The court then referred to seven factors the courts consider in deciding whether a particular worker is an employee or self-employed. The court emphasized that “no one factor dictates the outcome . . . ​rather we must look at all the facts and circumstances of each case.”

Table 2-3 summarizes the seven-factor test. The importance of this test cannot be overemphasized. The Tax Court ignored the IRS 20-factor test (discussed above) and substituted a seven-factor test. The court discussed each of the factors as follows:

Factor 1—degree of control exercised by the employer over the details of the work

The court emphasized that the right-to-control test is “the crucial test to determine the nature of a working relationship.” The more control exercised by an employer over the details of a worker’s job, the more likely the worker is an employee rather than self-employed. The court noted that the degree of actual control over a worker is important but not exclusive, since “we must examine not only the control exercised by an alleged employer, but also the degree to which an alleged employer may intervene to impose control.” The court observed that “in order for an employer to retain the requisite control over the details of an employee’s work, the employer need not stand over the employee and direct every move made by that employee.” Further, and this is a point the court stressed repeatedly, “the degree of control necessary to find employee status varies according to the nature of the services provided.” In particular, “the threshold level of control necessary to find employee status is generally lower when applied to professional services than when applied to nonprofessional services.” Therefore, less evidence of control (whether exercised or potential) is required to support a finding that a minister (or other professional) is an employee for income tax reporting purposes. The court quoted from a federal appeals court ruling: “From the very nature of the services rendered by . . . ​professionals, it would be wholly unrealistic to suggest that an employer should undertake the task of controlling the manner in which the professional conducts his activities.”

The court then itemized several factors that demonstrated sufficient control over Pastor Weber to establish employee status. These are listed below:

The court concluded its discussion of the first factor in its seven-factor test by noting: “Normally the control factor is the most persuasive factor in determining whether an employment relationship exists. We are mindful, however, that where professional individuals are involved this control ‘must necessarily be more tenuous and general than the control over nonprofessional employees.’ Nevertheless, it is clear that [Pastor Weber] is subject to significant control.”

Factor 2—which party invests in the facilities used in the work

The court then turned to the second factor in its seven-factor test. This factor asks which party (employer or worker) invests in the facilities used in the work. If the employer invests in or provides the facilities used by the worker to perform the work, this suggests an employer–employee relationship. The court observed: “[Pastor Weber] was not required to invest in the work facilities. The local churches provided him with a home. The local churches provided the church in which [he] gave his sermons, and which contained office space for performing his duties. The local churches bought religious materials for his ministry.”

The court dismissed the relevance of Pastor Weber’s assertion that he prepared the weekly church bulletin at home, used his own computer for church work, and purchased some of his own vestments and a personal library. The court noted that “his choice to work at home does not negate the fact that the local churches provided him with an office. [He] purchased computer equipment to make his work easier and to perform better. It does not prove that he was required to provide office equipment.” With regard to Pastor Weber’s assertion that he purchased his own vestments, the court observed that “vestments were not required by the local churches, nor were they necessary for him to perform his duties. [His] choice was merely his own preference.” Finally, the court pointed out that many professionals acquire their own libraries “whether they are employees or independent contractors.”

Factor 3—opportunity of the individual for profit or loss

The third factor is whether a worker has an opportunity to realize a profit or suffer a loss as a result of his or her services. Workers who are in a position to realize a profit or suffer a loss as a result of their services generally are self-employed, while employees ordinarily are not in such a position. The court concluded that this factor supported employee status in this case. It observed:

[Pastor Weber] was paid a salary, and provided with a parsonage, a utility expense allowance, and a travel expense allowance from each local church. Furthermore, if [he] was not assigned to a local church, the Annual Conference would pay him a minimum guaranteed salary, or if he were in special need, the Annual Conference could give him [special support]. Aside from minimal amounts earned for weddings and funerals and amounts spent on utilities and travel, [Pastor Weber] was not in a position to increase his profit, nor was he at risk for loss.

Factor 4—whether the employer has the right to discharge the worker

The authority of an employer to discharge a worker generally indicates that the worker is an employee rather than self-employed. The court concluded that Pastor Weber was subject to dismissal, and accordingly, this factor supported employee status. The court observed: “The Annual Conference had the right to try, reprove, suspend, deprive of ministerial office and credentials, expel or acquit, or locate [Pastor Weber] for unacceptability or inefficiency. The clergy members of the executive session of the Annual Conference had the authority to discipline and fire [Pastor Weber]. These are other strong factors indicating that [Pastor Weber] was an employee rather than [self-employed].”

Factor 5—whether the work is part of the employer’s regular business

The fifth factor addresses the nature of the worker’s services. Is the worker furthering the employer’s regular or customary business? If so, this indicates an employer–employee relationship. Again the court concluded that this factor supported a finding that Pastor Weber was an employee: “[Pastor Weber’s] work is an integral part of the United Methodist Church. A minister has the responsibility to lead a local church in conformance with the beliefs of the United Methodist Church, to give an account of his or her pastoral ministries to the Annual Conference according to prescribed forms, and to act as the administrative officer for that church.”

A bishop confirmed the integral part played by ministers in the mission of the Methodist Church. When asked “with respect to the pastor of the local church, would you also agree that to further the local church’s integral role in the mission of the United Methodist Church, the pastor must perform his or her responsibilities and duties in conformance with this mission in mind,” the bishop responded, “Yes, sir.”

Factor 6—permanency of the relationship

The sixth factor focuses on the permanency of the relationship between the employer and a worker. The more permanent the relationship, the more likely the worker is an employee. The court concluded that this factor suggested that Pastor Weber was an employee. The relationship between Methodist ministers and the United Methodist Church is “intended to be permanent as opposed to transitory.” Pastor Weber

has been an ordained United Methodist minister since 1978. [He] has conceded . . . ​that he is likely to remain a minister for his entire professional religious career, and that he is likely to remain affiliated with the North Carolina Annual Conference. The Annual Conference will pay a salary to a minister even when there are no positions with a local church available. The fact that ministers are also provided with retirement benefits indicates that the parties anticipate a long-term relationship. An independent contractor would not normally receive such benefits from a customer or client.

Further, Pastor Weber “does not make his services available to the general public, as would an independent contractor.” He “works at the local church by the year and not for individuals ‘by the job.’” The court also noted that Pastor Weber “was required to work at the church to which he was assigned, and was required to attend meetings.”

Factor 7—relationship the parties believe they are creating

The final factor asks what kind of relationship the parties themselves thought they were creating. Did they intend for the worker to be an employee or self-employed? The court again ruled that this factor supported its conclusion that Pastor Weber was an employee rather than self-employed: “Because there was no withholding of income taxes and no Form W-2, we assume that [Pastor Weber] and his supervisors believed that ministers such as [Pastor Weber] were independent contractors. We give this factor little weight.”

The court noted that the parties’ characterization of their relationship was completely negated by the volume of fringe benefits made available to Pastor Weber. The court concluded that these fringe benefits demonstrated, far more strongly than the parties’ outward intentions, that Pastor Weber was an employee rather than self-employed since the level of benefits was virtually unknown to self-employed workers. The court observed:

[Pastor Weber] received many benefits that we find are typical of those provided to employees rather than independent contractors, some of which follow. Each local church made contributions on [his] behalf . . . ​to a pension plan. [Pastor Weber] continued to receive his salary while on vacation. If needed, [he] would have been entitled to disability leave and paternity leave. If he could not be assigned to a local church, he would receive a guaranteed salary from the Annual Conference. If he were needy, he might be able to get [special relief] from the Annual Conference. A portion of the cost of [his] life insurance was paid by the local churches. The local churches paid a portion of the death benefit plan premiums, and [he] paid a portion. The local churches paid 75 percent of [his] 1988 health insurance premiums.

The court noted simply that “these enumerated benefits also indicate that [Pastor Weber] is an employee rather than self-employed.”

Conclusion

The court concluded its lengthy analysis of the facts of this case by observing: “After considering all the facts and circumstances present in this case, we conclude that the factors that indicate [that Pastor Weber] was an employee outweigh those factors that indicate that he was self-employed. Accordingly, we hold that [his] ordinary and necessary trade or business expenses paid in 1988 were not properly listed on Schedule C, but are allowable as miscellaneous itemized deductions on Schedule A, subject to the 2 percent floor.”

Identification of Pastor Weber’s employer

Amazingly, having concluded its lengthy discourse on the reasons why Pastor Weber was an employee rather than self-employed, the court refused to identify his employer. The court simply noted that “the parties have stipulated that the only issue in dispute is whether [Pastor Weber] was an employee or was self-employed. We need not decide which part of the United Methodist Church is the employer.” Unfortunately, the court left unanswered a fundamental question. Was Pastor Weber’s employer the annual conference, the local church, or some other entity within the Methodist Church? While the seven-factor test may clearly support employee status for Pastor Weber, it is not so clear in identifying his employer. Some of the factors suggest that the annual conference is the employer, while others point to the local church. Pastor Weber contended that no one agency within the Methodist Church exercised sufficient control over him to be his employer, and therefore an employer–employee relationship could not exist. The court responded to this argument as follows:

[Pastor Weber] contends that an employee-employer relationship cannot exist because there is no entity which exercised sufficient control over [him] so that he may be classified as an employee. He claims that the control over a minister is deliberately spread in a way that ensures that the minister has the maximum freedom to be the man or woman of God, which the United Methodist Church believes the ministry is all about. We do not question this polity for religious purposes. However, we disagree with [Pastor Weber’s] contention when we analyze this case by application of the relevant court decisions and regulations. We acknowledge that an important religious purpose is served by the organizational structure. Nonetheless, we find that there is sufficient control over [Pastor Weber] as well as several other factors which establish that he was an employee.

The identification of Pastor Weber’s employer is not an academic question. It will determine a number of important issues, including payroll tax reporting issues and the availability of various fringe benefits. One can only wonder if the court’s refusal to address this issue was based on the difficulty of answering it and the inconsistency of any answer with the court’s decision. Perhaps this also explains why the court took so long to announce its decision.

Tax Court’s decision not applicable to all ministers

While the Tax Court’s decision was considered a test case by several Methodist ministers, it is not a test case for ministers in other denominations. Although the court’s seven-factor test can now be used to evaluate the correct reporting status of other ministers, the court did not decide that all ministers are employees for income tax reporting purposes. Quite to the contrary, the Tax Court ended the Weber case with the following comment: “We recognize that there may be differences with respect to ministers in other churches or denominations, and the particular facts and circumstances must be considered in each case.”

Most ministers will be better off reporting their federal income taxes as employees since

Relevance of religious considerations

Some ministers point to theological considerations in support of their self-employed status. For example, some say they are theologically opposed to the notion that they are “controlled” by their church. The Tax Court was not sympathetic to this view. It observed:

[Pastor Weber’s] basic position appears to be that because he is a minister in a unique religious order he cannot be an employee. While we have great respect for [his] religious dedication, religion is not the question before us.

[Pastor Weber] is seeking a business benefit. He wants to file a Schedule C . . . ​and to claim business expenses on it. It is he who has cast this case in business terms.

The court also noted: “[Pastor Weber] contends that no one had the right to control either the method or the means by which he conducted his ministry. We do not agree.”

Tax Court’s decision upheld on appeal

In 1995 a federal appeals court upheld the Tax Court’s decision in the Weber case. It adopted the Tax Court’s decision as its own. Weber v. Commissioner, 60 F.3d 1104 (4th Cir. 1995).

Case 6—Shelley v. Commissioner, T.C. Memo. 1994-432 (1994)

Moments after issuing its decision in the Weber case, the Tax Court released a second opinion finding that a Pentecostal Holiness minister was self-employed rather than an employee for federal income tax reporting purposes. This second decision confirms that the Tax Court did not intend by its Weber decision to find all ministers to be employees. It also assures that the correct reporting status of individual ministers will be a continuing source of confusion and controversy.

The Tax Court applied the same seven-factor test it applied in the Weber case, but it concluded that Pastor Shelley was self-employed rather than an employee for federal income tax reporting purposes. Here is how the court analyzed each of the factors:

Factor 1—degree of control exercised by the employer over the details of the work

The court concluded that this factor supported a finding that Pastor Shelley was self-employed for income tax reporting purposes since his employing church exercised insufficient control over the details of his work. Here are some of the factors the court mentioned in reaching its conclusion:

However, these measures would not be used unless the pastor was unable to accomplish the basic goals for which he was hired, “to lead in worship, to lead in the nurture of believers, and to win the lost to Christ,” in a manner consistent with church doctrines. At no point would a quadrennial conference official step in and specifically tell the pastor how to run his church.

The court acknowledged that the denominational manual specified that ministers are “amenable to the quadrennial conference and the conference board.” However, this did not alter its conclusion that insufficient control was exercised over Pastor Shelley by either his church or denomination to render him an employee for income tax reporting purposes. The court concluded:

After considering all the facts and circumstances affecting the issue of control, we are persuaded that [Pastor Shelley] was “subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result.” Treas. Reg. 31.3401(c) 1(b). [His] primary responsibility was to help the church thrive. The record does not reflect that the church or the [state conference] retained any significant rights to control [his] efforts to accomplish this goal.

Factor 2—which party invests in the facilities used in the work

The court noted simply that while Pastor Shelley was not required to invest in the basic work facilities he used as a pastor, he did pay for the collection of his own substantial library (which he used in his ministry), and he regularly paid a portion of the expenses associated with continuing education courses and other church-related travel.

Factor 3—the opportunity of the individual for profit or loss

Members of the court did not consider this factor relevant under the circumstances of this case, since they “do not believe that the normal business risks of profit and loss are particularly applicable” to a minister. However, the court observed that “to the extent that this factor has any bearing, we note that [Pastor Shelley] had no guarantee from the [state conference] or the church that his salary would be maintained if the church was not successful or if he left the church and could not find another ministry within the [denomination]. In this sense, [he] did have some risk of loss.”

Factor 4—whether the employer has the right to discharge the worker

The IRS insisted that the fact that procedures are available to remove a Pentecostal Holiness minister from a church or to revoke a minister’s ordination certificate mandates a finding that Pastor Shelley was an employee. The Tax Court disagreed:

[Pastor Shelley] could not be fired at will by either the church board, the [state conference], or any other body within the [denomination]. Discharge of a pastor typically requires the involvement of the church board, the congregation, and the [state conference] board. According to the Manual, it is possible for the church board to vote to request that the congregation hold a vote of confidence with respect to a pastor. However, this possibility must be considered in conjunction with the fact that the pastor has the power to appoint and remove members of the church board. As stated above, the testimony offered at trial made clear that the [state conference] board will not evaluate a pastor or a minister until approached by a church with a problem that the church board and congregation have been unable to resolve. The procedures delineated in the Manual and by witnesses for dealing with dissension within the church are oriented more toward conflict resolution than termination, and differ from what we would expect to find in a typical employer–employee relationship. In the context of this case, we do not believe that the remote possibility that [Pastor Shelley] could be forced to leave the church or could have his ordination certificate withdrawn indicates that [he] was an employee rather than an independent contractor.

Factor 5—whether the work is part of the employer’s regular business

The court conceded that Pastor Shelley’s work “was part of both the church’s and the [denomination’s] regular business.” It noted that this “may tend to suggest that [he] was an employee; however, [it is] not significant enough to outweigh the conclusion we draw from the record that [Pastor Shelley] was an independent contractor [self-employed].”

Factor 6—permanency of the relationship

The court conceded that Pastor Shelley’s relationship with the church and the denomination was reasonably permanent. It noted that this “may tend to suggest that [he] was an employee; however, [it is] not significant enough to outweigh the conclusion we draw from the record that [Pastor Shelley] was an independent contractor [self-employed].”

Factor 7—relationship the parties believe they are creating

The court noted that no written agreement existed between Pastor Shelley and his church or state conference disclosing the type of relationship the parties believed they were creating. However, the court noted that Pastor Shelley “did not have any income tax withheld from his salary and did not receive any Forms W-2 from the church, the [state conference], or any other body in the [denomination]. We assume, therefore, that petitioner and the other parties involved believed that petitioner was an independent contractor.” The court rejected the assertion of the IRS that the church provided fringe benefits to Pastor Shelley that ordinarily are provided only to employees. As examples the IRS cited a biweekly salary, a health insurance plan provided by the state conference, disability leave, and vacation pay. The court observed:

While these benefits are more likely to be found in an employer–employee relationship, their presence does not eliminate the possibility that the taxpayer is an independent contractor, particularly in situations where the taxpayer maintains a relationship with a particular institution over a long period of time. . . . ​[Pastor Shelley] received some benefits typical of an employer–employee relationship. Nevertheless, considering [his] long-term relationship with the [denomination] we find it significant that there is no evidence that [he] received life insurance coverage or any retirement benefits through the [denomination, state conference] or the church.

Conclusion

The Tax Court concluded: “Based on the application of the enumerated factors to the facts and circumstances present in this case, we conclude that, during the years in issue, [Pastor Shelley] was an independent contractor and must report his business income and expenses on Schedules C.” The court added: “We are aware that Weber v. Commissioner, 103 T.C. 378 (1994), involving a United Methodist minister, shares certain similarities with the instant case but holds that the taxpayer was an employee. We find that the [Pentecostal Holiness Church] did not have the same type of relationship with [Pastor Shelley] that the United Methodist Church does with its ministers. Accordingly, we conclude that the facts and circumstances present in this case warrant our reaching a different conclusion than that reached in Weber.”

IRS appeal

The IRS appealed the Shelley decision to the federal court of appeals for the eleventh circuit. The case was settled out of court while the appeal was pending.

The IRS has issued three rulings addressing the question of whether a minister is an employee or self-employed for federal income tax reporting purposes. These rulings are discussed below, and they are summarized in the Appendix on page .

Ruling 1—IRS Letter Ruling 9825002 (1998)

The IRS ruled that a minister who served as a denominational official was an employee for federal income tax reporting purposes. The minister was ordained in 1969 and had served as minister to several congregations. In the early 1990s, he was appointed as a presiding elder of his church. As a presiding elder, the minister supervised 27 churches; conducted quarterly conferences and preached at churches within his district and advised congregations as needed; oversaw the collection of assessments from each church; presided over district conferences and Sunday-school conventions; licensed ministry candidates; and confirmed stewards, Sunday-school superintendents, and Christian-education directors. Denominational rules establish salary guidelines for each salaried worker. A presiding elder is guaranteed a minimum salary annually as well as additional allowances from each church. Fringe benefits provided to a presiding elder as part of his compensation package include an annual housing allowance, pension benefits, payment of the minister’s self-employment tax, and insurance (health, disability, and malpractice). Denominational rules specify that a presiding elder may be expelled or suspended from all official standing in the church if charged with any one or more of various offenses.

The minister insisted that he was self-employed for income tax reporting purposes, but the IRS concluded that he was an employee. The IRS conceded that “for federal income tax purposes, an ordained minister may be an employee or an independent contractor.” It concluded that the minister in this case was an employee on the basis of the Tax Court’s decision in the Weber case (finding that a Methodist minister was an employee). It noted that a minister’s correct reporting status will be based largely on church structure and that the minister in this case was much closer to the facts in the Weber case than to those cases in which ministers were found to be self-employed.

Ruling 2—IRS Letter Ruling 9414022 (1994)

In 1994 the IRS ruled that a youth pastor was an employee rather than self-employed for federal income tax reporting purposes. The youth pastor was responsible for the church’s youth ministry and was qualified to carry out all the ordinances of the church when necessary, including baptisms and communion; he received instructions from the senior pastor; the senior pastor supervised him and retained the right to change the methods used in the performance of his duties; he was hired for an indefinite period of time and was required to follow a schedule established by the church; he performed his services at the church’s location, and the church provided him with materials, equipment, and supplies and reimbursed him for expenses incurred in performing his services; he received a salary for his services plus a housing allowance; he received paid vacation; the church did not carry worker’s compensation for the youth pastor and did not deduct Social Security or federal income taxes from his pay; the church reported the youth pastor’s income to the IRS on Form W-2; the youth pastor performed his services on a full-time basis, at least eight hours a day; the church retained the right to discharge the youth pastor at any time, while he retained the right to terminate his services at any time without either party incurring any liability; the youth pastor performed his services under the church’s name and did not represent himself to the public as being in the business to perform such services for others; and he did not have a financial investment in the church and did not assume the risk of realizing a profit or suffering a loss.

The IRS, applying the 20-factor test for determining a taxpayer’s correct reporting status, concluded that the youth pastor was an employee for income tax reporting purposes. The IRS concluded that “the church has the right to and does, in fact, exercise the degree of direction and control necessary in establishing an employer–employee relationship. Accordingly, we conclude that the [youth pastor] is an employee of the church.” The IRS correctly pointed out that the youth pastor, like any minister, is self-employed for Social Security purposes with respect to services performed in the exercise of ministry.

Ruling 3—IRS Letter Ruling 8333107 (1983)

In 1983 the IRS ruled that an associate pastor was an employee for income tax reporting purposes. The pastor was under the supervision of a senior pastor and had primary responsibilities for the music, arts, drama, and missions program of his church. His responsibilities included working with the music, arts, drama, and missions committees and assisting the lead pastor and congregation in all phases of the ministry. He served as the resource person, motivator, and administrator of various church activities.

The church required the associate pastor to perform services during regular working hours. His services were supervised and reviewed by the church, and he received instructions from the church. His day-to-day activities were reviewed almost weekly by the senior pastor. He was required to attend a workshop of a general informative nature, and his budget included funds for one week of formalized training per year. All of the associate pastor’s duties had to be performed by him personally and could not be delegated by him to others. The church made contributions toward hospital or medical insurance for the associate pastor and provided him with an office in the church building. The associate pastor was paid an annual rate on a biweekly basis. He also was provided with lump-sum amounts for automobile and housing expenses. His services could be terminated for unsatisfactory performance. He had the right to terminate his services at any time.

Under these facts the IRS ruled that the associate pastor was an employee and not self-employed for federal income tax reporting purposes. It noted that “it is clear that [the church has] the right to direct and control the associate pastor to the degree necessary to create an employer–employee relationship.”

In 1995 the IRS released its first audit guidelines for ministers pursuant to its Market Segment Specialization Program (MSSP). The guidelines were intended to promote a higher degree of competence among agents who audit ministers. In 2009 the IRS released a newly revised version of the guidelines (the Minister Audit Technique Guide) that addresses a number of important issues and contains several examples.

The IRS audit guidelines introduce the correct classification of ministers for federal tax purposes with the following observations:

A minister can be a common law employee for income tax purposes even though the payments for services as a minister is [sic]statutorily considered income from self-employment for social security and medical taxes and the minister can even apply to be exempt from social security tax.

The handling of business expenses for income tax purposes is determined by whether the minister is classified as an employee or an independent contractor. If an independent contractor then the business expenses are reported on the Schedule C. If an employee then the expenses are reportable subject to statutory limitations as an employee business expense itemized deduction. To be properly reported on Schedule C, a minister’s expense must come from a trade or business of his own, other than that of being an employee.

How, then, can a minister’s correct reporting status be determined? The guidelines provide the following clarifications:

The guidelines refer to the following authorities in support of these conclusions:

Ministers should review the tests described in this chapter in determining their correct reporting status for federal income tax reporting purposes. Any of the tests can be used. The tests should be applied considering the court decisions and IRS rulings summarized above.

Note the following additional considerations.

IRS bias in favor of treating taxpayers as employees

The reason is simple—employees have federal taxes withheld from their wages by their employer, and so it is much more likely that their taxes will be paid than that a self-employed person’s will be. This consideration has no application to ministers, however, whose income is exempt by law from income tax withholding even if they are employees for income tax reporting purposes. IRC 3401(a)(9).

Ministers who may be self-employed for income tax reporting purposes

A number of situations exist in which a minister is more likely to be self-employed for federal income tax reporting purposes. These include the following:

Itinerant evangelists

Unincorporated evangelists who conduct services in several churches during the course of a year ordinarily would be considered self-employed for purposes of both income taxes and Social Security taxes. They ordinarily would not be considered employees under either the Tax Court’s seven-factor test or the IRS 20-factor test.

Guest speakers

Many ministers are called upon to conduct worship services in other churches on an occasional basis. To illustrate, Pastor D, who serves as senior minister at First Church, is invited to conduct a service at a church in another community. Ministers generally will be considered to be self-employed with respect to such occasional guest-speaking commitments.

Supply pastors

Many ministers serve temporary assignments in local churches until a permanent minister can be selected. In some cases these ministers will be self-employed with respect to such an assignment. This will depend on an application of the Tax Court’s seven-factor test (or the IRS 20-factor test). In general, the shorter the assignment, the more likely the minister will be considered self-employed.

Services provided directly to congregation members

IRS Publication 517 recognizes that it is possible for ministers who are employees of their churches for income tax reporting purposes to be self-employed for certain services (such as baptisms, marriages, and funerals) that are performed directly for individual members who, in turn, pay a fee or honorarium to the minister.

Church polity

In some cases a church’s polity may suggest that ministers are self-employed rather than employees for income tax reporting purposes. For example, ministers who are not associated with a regional or national religious body that exercises control over their activities will find it easier in some cases to argue that they are self-employed for income tax reporting purposes. It is significant that the Tax Court ended the Weber case with the following comment: “We recognize that there may be differences with respect to ministers in other churches or denominations, and the particular facts and circumstances must be considered in each case.”

Obtaining official determination of reporting status

Ministers can obtain an official determination of their reporting status by filing a Form SS-8 with the IRS. This can be a time-consuming and involved process, however, and the IRS demonstrates a decidedly pro-employee bias in its rulings. In other words, a minister wanting to report his or her income taxes as a self-employed person ordinarily will not be successful in obtaining IRS confirmation in response to an SS-8 application.

Ministers who elect self-employed status for theological reasons

Some ministers consider themselves to be under the control or authority of Jesus Christ rather than a local church or church board. Such persons feel they would be compromising their biblical authority by reporting as an employee since it would amount to an acknowledgment of subordination to local church authority. Such a view, if corroborated by appropriate language in the church’s charter or bylaws, might support self-employed status for income tax reporting purposes if, in fact, the church does not exercise meaningful control over the minister. Note, however, that an IRS auditor might want to determine whether the church board shares the minister’s theology on this point. If church board members do not agree that they lack any meaningful control over the minister, it is highly unlikely that this argument will prevail. Also, note that the Tax Court dismissed the relevance of theological considerations in the Weber case (see above) by observing:

[Pastor Weber’s] basic position appears to be that because he is a minister in a unique religious order he cannot be an employee. While we have great respect for [his] religious dedication, religion is not the question before us. [Pastor Weber] is seeking a business benefit. He wants to file a Schedule C . . . ​and to claim business expenses on it. It is he who has cast this case in business terms. . . . ​[Pastor Weber] contends that no one had the right to control either the method or the means by which he conducted his ministry. We do not agree.

Losing the housing allowance exclusion

A common misconception is that ministers who report their income taxes as employees will lose the housing allowance exclusion. This is not so. The housing allowance is available to ministers whether they report their income taxes as employees or as self-employed.

Section 530 of the Revenue Act of 1978

In the late 1960s, the IRS began vigorously challenging employer attempts to classify workers as self-employed rather than as employees. In many cases employers were assessed large penalties for improperly classifying some workers as self-employed. Congress responded to these developments by enacting section 530 of the Revenue Act of 1978. Section 530 was designed to provide employers with relief from hostile IRS attempts to reclassify workers as employees. If employers meet certain requirements set forth in section 530, they are relieved of penalties that otherwise might apply because of their treatment of workers as self-employed.

The IRS has interpreted section 530 in ways that seriously undermine the protections it was designed to create. Congress responded to these IRS efforts by enacting legislation repudiating most of the schemes the IRS has used over the years to avoid section 530.

The important point to note is that section 530 only relieves employers of penalties for improperly classifying a worker as self-employed. It provides no relief to such workers in defending their self-employed status for purposes of their individual income tax returns. Section 530 is addressed more fully under “Section 530” on page . See also IRS Publication 1976 (Do You Qualify for Relief under Section 530?).

Voluntary Classification Settlement Program

The Voluntary Classification Settlement Program (VCSP) is a voluntary program that provides an opportunity for employers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this new voluntary program, the employer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

The employer must have consistently treated the workers as nonemployees and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years in order to participate in the VCSP. Additionally, the employer cannot currently be under employer tax audit by the IRS and cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit.

Exempt organizations may participate in the VCSP if they meet all of the eligibility requirements.

An employer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the employer will

In addition, as part of the VCSP program, the employer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date on which it has agreed under the VCSP closing agreement to begin treating the workers as employees.

To participate in the VCSP, an employer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days from the date the employer wants to begin treating its workers as employees.

Officers and directors

The income tax regulations address the correct reporting status of officers and directors as follows:

All classes or grades of employees are included within the relationship of employer and employee. Thus, superintendents, managers, and other supervisory personnel are employees. Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is not considered to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation. Treas. Reg. 31.3401(c)(1)(f).

Legal responsibility of employers for acts of their employees

Some courts have concluded that ministers serving local churches are employees rather than self-employed in deciding if the church is responsible for their acts on the basis of vicarious liability. For example, a federal appeals court concluded that a Methodist church was legally responsible for the copyright infringement of a minister of music since “the only inference that reasonably can be drawn from the evidence is that in selecting and arranging the song . . . ​for use by the church choir [the minister] was engaged in the course and scope of his employment by the church.” Wihtol v. Crow, 309 F.2d 777 (8th Cir. 1962).

Many other cases have concerned accidents involving motor vehicles driven by ministers in the course of church work. Such cases support the treatment of ministers as employees for income tax purposes since the legal considerations employed in determining whether a minister is an employee for church liability purposes are substantially the same as those used in determining whether a minister is an employee for income tax purposes. Note, however, that some courts have not agreed with these rulings. To illustrate, the Kansas Supreme Court concluded that a Catholic priest was self-employed for purposes of determining the legal liability of his diocese for his misconduct even though the diocese “followed the majority of dioceses in issuing a W-2 form to each priest.” Brillhart v. Sheier, 758 P.2d 219 (Kan. 1988).

Workers’ compensation

Ministers who report their federal income taxes as self-employed are not necessarily self-employed for workers’ compensation purposes. The term employee generally is defined more broadly under workers’ compensation laws than under federal tax law.

Penalties

As noted under “Why church leaders should take the payroll tax reporting rules seriously” on page , a church can be assessed penalties for reporting as self-employed a worker whom the IRS later determines to be an employee.

Many churches employ staff members other than ministers. In general, the same tests for determining whether a minister is an employee or self-employed for federal income tax reporting purposes will apply in evaluating the correct reporting status of nonminister staff. Some differences, however, should be noted:

Nonminister staff, unlike ministers, are not always treated as self-employed for Social Security. Nonminister staff who are employees for income tax reporting purposes under the tests discussed in this chapter generally must be treated as employees for Social Security. This means they will be subject to Social Security and Medicare taxes. One exception is that nonminister staff members employed by a church that exempted itself from payment of the employer’s share of FICA taxes by filing a timely Form 8274 (explained under “A limited exemption” on page ) are treated as self-employed for Social Security.

Nonminister staff members who are employees for income tax reporting purposes are subject to income tax as well as Social Security and Medicare tax withholding.

EXAMPLE A church employed a worker to serve as church custodian under the following terms and conditions: (1) the position of church custodian is advertised for bids on a yearly basis; (2) the custodian is required to follow guidelines established by the church; (3) the custodian’s duties include the cleaning of the church building and, when necessary, snow removal; (4) the custodian works at the church once each week; (5) the custodian is not required to perform services during regular working hours but rather performs his duties at his own discretion; (6) the church reviews the custodian’s services only to the extent necessary to ensure that they are completed in accordance with church guidelines; (7) equipment and supplies are furnished to the custodian at no cost (the custodian purchases the necessary supplies and is reimbursed by the church treasurer); (8) the custodian is paid on a monthly basis; (9) the church assumes that the custodian will perform his services personally; (10) the custodian does not engage helpers to assist in the work; (11) the custodian is not eligible for bonuses, pensions, sick pay, or other fringe benefits; (12) the church does not make contributions toward hospital or medical insurance for the custodian; (13) no formal guidelines have been established for termination, but the custodian could be terminated for gross negligence; (14) the custodian can terminate his services at any time; (15) the custodian does not perform similar services for others.

It is the church’s belief that the custodian is self-employed rather than an employee, and accordingly, it has not withheld FICA taxes or income taxes from the custodian’s compensation. The IRS disagreed, concluding that the custodian was an employee. The IRS observed:

Careful consideration has been given to the information submitted in this case. The facts show that the [custodian is] subject to certain restraints and conditions that are indicative of the church’s control over [him]. The [custodian] performs personal services for the church on its premises and property. [He performs his] services according to guidelines established by the church. He renders his services personally and does not engage any helpers or assistants. The church provides him with the use of equipment and supplies in the performance of services at no cost. His services are supervised and reviewed. His services are necessary and incident to the church’s operation. He is not engaged in an independent enterprise in which he assumes the usual business risks. He has a continuous relationship with the church as opposed to a single transaction. Both parties could terminate the agreement at any time. IRS Letter Ruling 8505023.

EXAMPLE Pastor P is a retired minister who serves as an interim minister for churches in a given geographical region that are temporarily in need of ministerial services. Pastor P typically spends no more than three months with any particular congregation, is given great freedom with respect to the duties he performs and the manner or method of performance, and is issued a Form 1099-NEC form by each church. These facts suggest that Pastor P could report his income and business expenses as a self-employed person on Schedule C.

EXAMPLE Pastor L is a minister of education at First Church. She has a specific job description, her services are under the direct supervision and control of her senior pastor, she is issued a Form W-2 each year, and she is required to follow prescribed methods in the performance of her duties. These facts strongly suggest that Pastor L is an employee for income tax reporting purposes.

EXAMPLE Pastor G serves as pastor of a small congregation that has no other employees. He performs his duties free from any control or supervision by the church. Much of his work is performed off church premises. He is issued a Form 1099-NEC each year, and his work agreement with the church characterizes him as self-employed. Under these facts, the federal appeals court’s decision in the Alford case (discussed above) suggests that Pastor G may be self-employed for income tax reporting purposes. However, Pastor G should carefully evaluate the following three advantages of employee status before continuing to report as self-employed: (1) the value of various fringe benefits will be excludable; (2) the risk of an IRS audit is substantially lower; and (3) as an employee he would avoid the additional taxes and penalties that may apply to self-employed ministers who are audited by the IRS and reclassified as employees.

EXAMPLE Same facts as the previous example, except that Pastor G is senior minister of a church with two other ministers and 10 lay employees. It is less likely that Pastor G will be able to use the Alford case to support his self-employed status, because ministers in larger churches tend to be subject to more control with respect to the way they perform their duties.

EXAMPLE Pastor M works in an administrative capacity for a church agency. Ordinarily, ministers who work in such a capacity will satisfy the definition of a common-law employee since they are subject to a greater degree of control and supervision with respect to the details and performance of their duties, and accordingly, they should report their income taxes as employees. The income tax regulations specify that “generally, an officer of a corporation is an employee of the corporation.” Treas. Reg. 31.3401(c)-1(f).

EXAMPLE Pastor H serves as a church’s associate minister. Ordinarily, ministers who work in such a capacity will satisfy the definition of a common-law employee since they are subject to a greater degree of control and supervision with respect to the details and performance of their duties, and accordingly, they should report their income taxes as employees. IRS Letter Ruling 9414022.

EXAMPLE Pastor C has been the senior minister at a church since 2007. He reports his income taxes as a self-employed person on Schedule C (Form 1040). The church issues Pastor C a Form W-2 at the end of each year and includes his compensation on its quarterly Form 941. Pastor C’s predecessor was Pastor B, who reported his income taxes as an employee. The fact that the church issues Pastor C a Form W-2 rather than a 1099-NEC and includes his compensation on its quarterly employer’s tax returns (Forms 941) would probably result in a determination that he is an employee for income tax reporting purposes in the event that his return is audited by the IRS.

EXAMPLE Pastor W has reported his federal income taxes as a self-employed person for many years. In 2024 he decides to report his taxes as an employee. His employing church withholds FICA taxes from his pay throughout 2024 and, in addition, pays the employer’s share of FICA taxes. The tax code treats ministers as self-employed for Social Security purposes with respect to services performed in the exercise of their ministry (except for some chaplains), and so they are not subject to FICA taxes with respect to such services. Pastor W’s decision to report his income taxes as an employee did not change his self-employed status for Social Security purposes. The church is incorrectly treating Pastor W as an employee for FICA purposes. He should continue to pay the self-employment tax (the Social Security tax for self-employed persons).

EXAMPLE Pastor O reports her income taxes as a self-employed person. She had $4,000 of business expenses in 2024 that were not reimbursed by her church. She deducted all of them on Schedule C. Pastor O is later audited by the IRS and is reclassified as an employee. She will not be able to deduct any of the $4,000 of business expenses, since unreimbursed business expenses are no longer deductible by employees as an itemized deduction on Schedule A. This result can be avoided if the church adopts an accountable reimbursement plan (see “Accountable reimbursed expenses” on page  for details).

EXAMPLE In a case in which the IRS argued that “love offerings” given to a pastor by his church represented taxable compensation, the IRS conceded that the pastor was self-employed for income tax reporting purposes. Swaringer v. Commissioner, T.C. Summary Opinion 2001-37 (2001).

EXAMPLE A church submitted a Form SS-8 to the IRS requesting a determination regarding the correct reporting status of a church musician. The church had been reporting the musician as a self-employed worker and issued him a Form 1099-NEC each year. The church summarized the facts as follows: (1) the musician performed music on Sunday mornings for one hour; (2) he practiced for two hours each week; (3) he received instructions from the pastor via email; (4) the musician provided his own instrument, while the church provided all of the other necessary supplies and materials he needed to fulfill his duties; (5) the musician received a weekly stipend for his services; (6) there was no written employment contract; (7) the musician’s services were a necessary part of the church’s activities; (8) the musician did not advertise his services to the general public, nor did he provide similar services for others; (9) the musician had a continuous relationship (for four years) with the church; (10) both parties had the right to terminate the relationship without incurring liability. Based on these facts, the IRS concluded that the musician was an employee rather than self-employed for income tax reporting purposes. The IRS concluded that the church “had the right to exercise direction and control over the worker to the degree necessary to establish that the worker was a common law employee and not an independent contractor operating a trade of business.” Form 14430-A (July 2013).

EXAMPLE The Kansas Supreme Court ruled that a church organist (the “plaintiff”) was an employee rather than an independent contractor. The court concluded:

The fact that an employer does not withhold social security or income tax from an agent’s compensation does not alone establish the agent’s status as an independent contractor. . . . ​The church rector was given the authority to determine the time plaintiff performed [and] the authority to make final decisions concerning the amount, nature, and type of music that was to be played. . . . ​The church’s rector possessed the ultimate authority and control over the plaintiff’s performances, not only as to the selection of music but also as to the details of its performance. The church paid the plaintiff by the month and also possessed the ability under the contract to discharge him upon ninety days’ notice. Finally, the church supplied the instrumentality that was the basis for plaintiff’s services—the church organ. In light of these facts, the trial court correctly determined that plaintiff was an employee rather than an independent contractor. Danes v. St. David’s Episcopal Church, 752 P.2d 653 (Kan. 1988).