Key point. The Tax Court uses a seven-part test in deciding if a minister is an employee or an independent contractor for payroll reporting purposes.
The United States 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 a previous ruling involving the tax status of a minister. 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 of income taxes from his compensation.
What This Means For Churches:
This case illustrates the continuing relevance of the seven-factor test adopted by the Tax Court in the Weber case (1994) for determining the correct reporting status of ministers. Unfortunately, however, the Court failed to explain that clergy are not subject to FICA taxes with respect to their ministerial compensation (they are regarded as self-employed for Social Security and pay self-employment taxes), and their ministerial wages are exempt from income tax withholding unless they elect voluntary withholding. Ungvar v. Commissioner, T.C. Memo. 2013-161.
