Category Personnel/Employment
Title Employee Versus Independent Contractor in the Christian School
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Preview Employee Versus Independent Contractor in the Christians School
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Employee Versus Independent Contractor in the Christian School

Christian school have asked ACSI about whether their employees can be viewed as independent contractors.  It is the view of ACSI that in the typical Christian school most if not all employees are not independent contractors. Here are two articles that have been printed in the LLU, one from the Internal Revenue Service (IRS) website that will help you determine the difference between an employee and an independent contractor and the other from a CPA firm.   

Employee vs. Independent Contractor-Seven Tips for Business Owners
IRS Summertime Tax Tip 2010-20  

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers' paychecks and what tax documents you need to file.  

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.  

  1. The IRS uses three characteristics to determine the relationship between businesses and workers:
    1. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
    2. Financial Control covers facts that show whether the business has a right to direct or control the financial business aspects of the worker's job.
    3. Type of Relationship factor relates to how the workers and the business owner perceive their relationship
  2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.  
  3. If you can direct or control only the result of the work done-and not the means and methods of accomplishing the result-then your workers are probably independent contractors. 
  4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.   
  5. Workers can avoid higher tax bills and lost benefits if they know their proper status.   
  6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.   
  7. You can learn more about the critical determination of a worker's status as an independent contractor or employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide; Publication 1779, Independent Contractor or Employee; and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).  

Links

Reprinted from the Internal Revenue Service website, www.irs.gov/uac/Employee-vs.-Independent-Contractor-–-Seven-Tips-for-Business-Owners.  

LLU 23.3     

Employees vs. Independent Contractors: Classify Your Workers per IRS Guidelines
Reprinted from Nonprofit Issues Newsletter, Fall 2012. Used by permission of CapinCrouse LLP.  

The IRS has publicly stated it plans to crack down on organizations that improperly classify workers as independent contractors instead of employees. Are you confident your employee classifications would stand up to IRS scrutiny?  

Understand the requirements

If a worker is an employee, your nonprofit must provide a Form W-2 annually and withhold income tax and the employee's portion of Social Security and Medicare taxes from the employee's pay. You also must pay the employer portion of Social Security, Medicare and unemployment taxes on the employee's wages.  

If a worker is an independent contractor, your organization generally should provide a Form 1099-MISC, which reports the amount you've paid to the person that year. The independent contractor is responsible for paying employment taxes (both the employee and employer portions) and income taxes on his or her own.  

While the IRS generally should receive the same amount of total income and employment taxes regardless of whether someone is an employee or an independent contractor, the agency has found that it's more difficult to collect from independent contractors. Thus, the IRS tends to favor employee status.  

Should the IRS determine you've improperly classified an employee as an independent contractor, you may be held liable for that worker's applicable employment taxes.  

Take the test

To determine whether a worker is an employee or an independent contractor, you must consider your nonprofit's degree of control and the person's level of independence. The IRS has assembled a number of questions to help employers decide. Commonly referred to as the "20-factor test" or "common law rule," the questions revolve around:  

  • Whether your organization has the right to control the individual and how that person performs his or her duties (that is, behavioral control),
  • Whether there's a written contract between the individual and your nonprofit, and if the person receives employee benefits (that is, type of relationship), and 
  • Which aspects of the business relationship your organization controls (that is, financial control).

The IRS has suggested asking certain questions when determining status. For example, must a worker follow someone else's instructions regarding when, where and how he or she completes work? If so, the person is probably an employee.  

More examples: Employees are typically trained how to perform a given job, whereas independent contractors are expected to already know how to do it. Independent contractors must pay their own assistants. And someone who retains the ability to set his or her own daily hours (within reason) is generally regarded as an independent contractor.  

Another factor to consider is whether the person works for more than one business at a time, which would indicate contractor status. Someone paid by the hour, week or month (rather than by the job), on the other hand, typically signals employee status.  

Let the IRS help

If you're unsure whether an individual should be classified as an employee or an independent contractor, you can complete Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding," and the IRS will decide for you. The process is free, though it might take six months or more to receive the determination.  

Organizations that inadvertently misclassify an employee as an independent contractor may be able to mitigate the consequences under the IRS's Voluntary Classification Settlement Program. Ask your tax advisor for details.  

Meeting the challenge

The IRS has reported that it loses millions in unpaid taxes and uncollected penalties for misclassified workers each year - and is looking to get it back. Make sure your nonprofit is following the rules.  

This article first appeared in Nonprofit Issues Newsletter, Fall 2012, issued by CapinCrouse LLP. CapinCrouse, www.capincrouse.com, serves the not-for-profit community with assurance, tax, and advisory services. CapinCrouse is dedicated to helping clients operate with financial integrity so that they can dedicate themselves to fulfilling their mission.    

LLU 23.2     

Notice: This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It has been provided to member schools with the understanding that ACSI is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.  

Association of Christian Schools International
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Colorado Springs, CO 80920
Phone: 719.528.6906
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