How to Hire Church Employees the Right Way; Part 1

Every now and then I receive an email or phone call from a pastor who has allowed us to serve him and his church. Today, I’d like to share with you an excerpt from an email I received from a pastor just a few days ago.

It reads as follows:

“Pastor Raul, I would just like to thank you and your staff for helping us incorporate and setup a 501(c)(3) for the church. You don't know how relieved we are! During this process the Lord has tripled our attendance and we are continuing to grow! So much so that we have decided to start a community development corporation and we will be hiring our first employees for the church this fall. Since this is a new step for us, we would like to know what steps we need to take to correctly hire employees. Can you give us some guidance?”

As I read this email, I was overcome with joy and satisfaction knowing that we were able to play a part in helping this pastor see the fruits of his labor begin to come to pass. At the same time, I was struck by the last two sentences of his email.

Sitting at my desk, I began to realize that there are most likely other churches and ministries just like this one. They have experienced a season of growth and the time has come to begin hiring church staff. But they are simply not sure where to begin or what to do.

Perhaps this describes you and your church. Or maybe you are not necessarily looking to hire staff members right now, but you know you will be in the near future.

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Well, to the pastor who wrote me that wonderful email, and to those of you who have similar questions, here is my advice.

Before you hire

Before you hire someone at your church/ministry, you need to verify certain information concerning that person's eligibility to work in the U.S. Though an individual's work status in this country may seem obvious to you, federal regulations require that certain due diligence steps be taken prior to an individual’s first day of work.

Below is a quick list of requirements.

1. Define who is an employee and who is a contractor:

The definition of an employee is not up to our own interpretation. I often have conversations with church administrators who tell me, "We pay our pastor as a contractor." I also hear, "We pay all of our staff as contractors."

Just because you pay them as contractors, it does not make them contractors.

When determining who is an employee for tax purposes, the IRS takes into consideration three different factors: behavioral control, financial control, and relationship of the parties.

Let’s take a brief look at what each of these mean:

a. Behavioral control:  Ask yourself, does my church have the ability to control what the person does or how they do it? If the church has the ability to control when and how the individual does their job, they are considered an employee.

b. Financial control: Are the business aspects of the worker's job controlled by the church? How is the worker paid? Is the worker free to seek other jobs or is this his only one? If not, he is an employee. An independent contractor is generally free to seek out business opportunities in the same field. If not, then he is an employee.

c. Relationship of the parties: Does the person perform work that is considered a key component of your church’s existence? For instance, a pastor’s job is vital to the existence of the church. Therefore, a pastor is always an employee. Many churches mistakenly hire and pay their pastor(s) as a contractor.

2. Each employee must fill out Form I-9:

Federal law requires the church to verify a person's eligibility to work in the U.S. In order to do that, the prospective employee, including the pastor, must fill out Form I-9.

(Recommended reading: "The First Thing Every Church New Hire Must Do")

The form is divided into three sections: one for the prospective employee, and the other two for the employer.

Of particular importance is section two of the form. It requires the employer to verify certain documents in order to properly establish "evidence of identity". These documents include:

  • a passport,
  • a driver's license,
  • a social security card, and
  • several other forms of identification.

An authorized person of the church is required, under penalty of perjury, to examine the said documents presented and certify that they appear to be genuine.

Once the prospective employee and proper person at the church have signed the form, the document is required to be kept at the church.

3. Use E-Verify:

E-Verify is a federal database that helps employers determine the eligibility of employees and the validity of social security numbers. It is important to know if your state requires the use of E-Verify.

4. Use of state registry Federal Parent Locator Service:

A little known federal law exists in Title 42 Subsection 663 that requires all employers to report all new hires to a state agency, the Federal Parent Locator Service. This law was passed to make easier the tracking down of parents who owe child support by knowing when they were hired.

5. W-4 Form:

Every employer is required to collect from every employee Form W-4 for purposes of determining the correct amount of federal income tax to withhold.

If the employee is a minister, keep in mind that though he is required to fill out Form W-4, he is exempt from income tax withholdings and therefore, should only fill out lines 1, 2, 3, 4, and 7, and sign it. All other employees must fill out the form in its entirety and turn it in to the church.

(Related article: “3 Common Mistakes Churches Make When Paying Pastors”)

The church is required to use the form to determine how much federal income tax to withhold and save the form in its internal records. This form is not sent to the IRS.

What happens after you hire?

After you hire an employee, you will be required to make monthly deposits as well as file quarterly reports and then annual W-2 Forms. In addition, each state has its own requirements that you need to keep in mind.

We’ll talk about these requirements and also explain why compensation agreements are necessary for your church in part two of this blog.

I encourage you and some of your staff or board members to consider attending one of our Ultimate Church Structure Conferences. During this time you will learn about the tax benefits and tax saving strategies afforded to ministers when they are hired at your church, plus much more. If you plan on going on salary at your church or will hire additional staff members, then this is a conference you will want to attend.

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