Excerpts from the Mauck & Baker Church Legal Checklist
Churches are unique from for-profit companies and not-for-profit organizations, so naturally there are different steps they should take when it comes to hiring employees, doing payroll, and having volunteers. In this article we cover significant aspects that churches should keep in mind when dealing with payroll, employees, and volunteers to avoid legal trouble.
Payroll
[Richard R. Hammar, Church and Clergy Tax Guide, 2006 ed., ch. 11.]
The Internal Revenue Service, the Illinois Department of Revenue, and local authorities require timely filing and reporting by employers. Failure to comply with these requirements may cause a church the substantial costs of corrections and filings. Moreover, some exemptions from payroll withholding for church employees may be applicable but not automatic, and may have strict time deadlines for claiming the exemptions. The only way to ensure that your church is taking full advantage of tax provisions applicable to churches is to follow IRS rules in this important area.
Has your church obtained an employer identification number (EIN) from the federal government? This number must be listed on some of the returns listed below, and is used to reconcile a church's deposits of withheld taxes with the W-2 forms it issues to employees. The EIN is a nine-digit number that looks like this: 12-3456789.
Has your church properly classified its workers as either employees or self-employed? IRS regulations contain many criteria for determining whether a worker is an employee or self-employed. Churches should be careful about classifying any worker as self-employed, since the Internal Revenue Code penalizes an employer that fails to withhold income taxes or social security taxes from the compensation of a worker on the ground that he is self-employed, if the IRS later finds that the worker was an employee.
Does your church withhold state and federal income taxes for non-minister employees? Churches need not withhold federal income tax from the compensation of clergy who satisfy the IRS’s definition of “minister” for tax purposes, whether the clergy report their incomes as employees or as self-employed. Clergy pay their taxes using the quarterly estimated tax procedure unless they request voluntary withholding. Non-minister employees do not fall within this exemption, and their compensation is subject to ordinary withholding requirements. Church officers – e.g., board members, the treasurer – may be personally liable for a penalty equal to the amount of required payroll taxes that were not withheld or deposited.
Does your church deposit withheld taxes (including the church's share of FICA taxes) as required by law?
Does your church file 941 forms (the employer's quarterly tax return) as required? This form is required if your church has at least one non-minister employee.
Does your church issue W-2 forms to employees by February 1st of each year?
If your church issues W-2 forms, do you also file a timely W-3 form with the Social Security Administration?
Does your church issue a Form 1099-MISC by February 1st to each self-employed worker who is paid at least $600 during the year?
If your church issues 1099-MISC forms, does it also file a timely 1096 form with the IRS? Churches must withhold 28% of the compensation paid to a self-employed person who fails to provide his social security number to the church. This is referred to as "backup withholding" and is designed to promote the reporting of taxable income. Failure to make backup withholding may cause the church to be liable for the tax.
Employees
[Richard R. Hammar, Pastor, Church & Law, 3rd ed., chapters 8 and 10]
Employment law is a mine field where ignorance or lack of proper procedures can be deadly. A church should fulfill its duties as an employer by appropriate reporting and by implementing procedures for handling employees pre-hiring through post-termination. Churches may discriminate in hiring on the basis of religion, but not on other bases. Churches that are engaged in interstate commerce may be subject to federal nondiscrimination laws that are not addressed here; those churches should work with legal counsel to ensure compliance with applicable laws.
Does your church require all new employees, including clergy, to complete and submit an I-9 form? Since 1987, every employer in the United States has been required to confirm the identity of all new employees and to verify that they are American citizens or aliens legally authorized to work in this country. Churches are subject to this requirement.
Does your church screen employees, including clergy, who will deal personally with minors, in order to reduce the risk of child abuse? Child sexual abuse presents one of the greatest risks for churches. It is extremely important to screen workers adequately to reduce the risk of child sexual abuse. A church and its leaders may be legally liable for damages caused by negligent selection of church employees. Adequate screening includes a variety of measures, such as an application form, interviews, checking references and employment history, and especially criminal records.
Does your church adequately orient new employees to its policies and procedures and furnish them with an employee handbook?
Does your church provide continuing education of its employees to help them perform their duties in compliance with changing federal, state, and local laws?
If you have an employee handbook, is it reviewed regularly by a lawyer familiar with the application of employment law to churches? An employee handbook can be a liability if it is not properly drafted and kept up to date.
Do church employees understand their legal duty to report known or reasonably suspected incidents of child abuse to state authorities? Church employees must report child abuse under Illinois law. They can be criminally and civilly liable for failing to report.
Does your church supervise employees, including clergy, to reduce the risk of negligence and misconduct? A church and its leaders may be legally liable for damages caused by negligent supervision of church employees. The law requires reasonable oversight in view of the risks.
Does your church promptly and thoroughly investigate allegations of misconduct by employees? Employees sometimes are accused of misconduct (such as child abuse, seduction, or harassment) on the job. The way a church responds to these accusations can greatly affect the likelihood that it will be sued.
Does your church have a procedure for terminating or otherwise disciplining employees that is based on Scripture, and has that procedure been approved by a lawyer?
Do you obtain a signed release that shields your church and leaders from liability for comments before giving a reference letter about a former employee?
Does your church carry workers’ compensation insurance? Churches are subject to the Illinois workers’ compensation law. Failure to carry insurance that covers a work-related injury to an employee may result in an uninsured loss, because most general liability insurance policies exclude such injuries from coverage.
If your church provides employees with a “cafeteria plan” (including a flexible spending arrangement) under section 125 of the Internal Revenue Code, do you file IRS Form 5500 annually?
If your church operates a school or preschool or child care, does it comply with federal requirements for minimum wage and overtime pay? Employees of a church-operated schools and preschools and child care facilities are protected by federal minimum wage and overtime pay regulations. Failure to comply with these requirements can make a church liable for substantial penalties.
If your church pays more than $100,000 annual compensation to any employee, has this level of compensation been approved by a qualified tax lawyer? A church can lose its exemption from federal income taxation if it pays any worker “unreasonable” compensation. To avoid jeopardizing tax- exempt status, compensation in excess of $100,000 should be carefully reviewed to determine its reasonableness.
Does your church have a Scripture-based binding arbitration procedure for settling employment disputes? Again, start with something like Matthew 18.
Does your church have a policy involving sexuality and a policy with regard to employee’s sexual conduct?
Does your Church’s insurance carry “Employment Practices Liability Insurance Coverage”?
Volunteers
[Richard R. Hammar, Pastor, Church & Law, 3rd ed., chapter 10]
Volunteers in lay ministry are usually the strength of the church. Nonetheless, recent legal developments may make a church liable for harm caused by its volunteer unless special steps are taken to minimize such risk. The church must give the same kind of care to the selection and supervision of volunteers that it gives to church employees.
Does your church screen volunteers who will deal personally with minors, in order to reduce the risk of child abuse? A church and its leaders may be legally liable for damages caused by negligent selection of volunteers. Adequate screening includes a variety of measures, such as an application form, interviews, checking references and employment history, and especially criminal records.
Does your church adequately orient new volunteers to its policies and procedures?
Does your church provide continuing education of its volunteers to help them act in compliance with changing federal, state, and local laws?
Do church volunteers understand their legal duty to report known or reasonably suspected incidents of child abuse to state authorities? Church volunteers must report child abuse to state authorities under Illinois law. They can be criminally and civilly liable for failing to report.
Does your church supervise volunteers to reduce the risk of negligence and misconduct? A church and its leaders may be legally liable for damages caused by negligent supervision of church volunteers.
Does your church promptly and thoroughly investigate allegations of misconduct by volunteers? Volunteers sometimes are accused of misconduct in their activities. The way a church responds to these accusations can greatly affect the likelihood that it will be sued.
Do you obtain a signed release that shields your church and leaders from liability for comments before giving a testimonial letter about a current or former volunteer?
Does your church carry workers’ compensation insurance? Churches are subject to the Illinois workers’ compensation law. Failure to carry insurance that covers a work-related injury to an “employee” may result in an uninsured loss, because most general liability insurance policies exclude such injuries from coverage. Illinois defines the term "employee" very broadly.
Are staff and volunteers encouraged to take basic first-aid and CPR classes?