Where to begin? The year opened with almost daily inquiries about AB-5, legislation that took effect Jan. 1, codifying the “A-B-C test” created by the state Supreme Court in mid-2018. I have written several articles on this over more than a year.
Essentially, many of our churches have been misclassifying musicians, custodians, office workers and nursery workers as independent contractors for decades instead of properly classifying them as employees. Please visit csbc.com and search the Compliance category for various articles that will help explain this.
However, and along this line, a much more troubling inquiry came to me a few weeks ago. A church wanted to know if it could pay a part-time worship leader $200 per week for less than three hours of work as an independent contractor.
No. And not only no, this person is an employee; but no, the church cannot pay $200 per week for just a couple of hours of work.
The Internal Revenue Code prohibits nonprofit organizations from providing “private benefits” to individuals with its “net assets.” Although churches may pay employees for their services, the compensation must be “reasonable;” $200 for two-and-a-half hours of work equals an hourly rate of $80. If this rate were paid to a full-time employee, it would equal more than $166,000 per year ... three times as much as the pastor’s compensation. And more than 50 percent of the church’s current annual budget.
“But we can’t get anyone to do it for less than that.”
Maybe so, but the amount of compensation is unreasonable in light of the amount of work performed. And paying unreasonable compensation could cost the church its tax-exempt status and/or result in fines of up to 225 percent of the benefit, some of which could be assessed individually against members of the “board of directors” who approved the private benefit.
Is it possible to pay employees a flat amount of money each week? Yes. But employees must receive at least a minimum of $12 per hour (the minimum wage in some cities is higher in 2020), so you must keep track of their actual hours worked; $50 for four hours is just over minimum wage. But if the employee did not receive a 10-minute, duty-free rest break in that four-hour period, you owe him/her an additional hour of pay. Now you’ve violated minimum wage law because the employee should have received $62.50.
And yes, the church must also withhold taxes, pay the employer’s share of FICA for each employee, and pay for workers’ compensation insurance.
If your church is misclassifying its employees as contractors, stop! Now! You must become compliant, or you must enlist more volunteers. All it takes is one complaint sent to the state for the church to be investigated for violations of wage-and-hour laws. Penalties can be severe.
For more information, as always, contact me at 559-256-0858 or firstname.lastname@example.org We’re here to help!