Religious Non-profit Avoids Employment Taxes for Payments to Former Board Member

A non-profit religious organization avoided a sizable tax penalty when the U.S. Tax Court concluded that it did not improperly fail to pay employment taxes on a former board member. The payments the organization made to the former board member were support, not wages, and the relationship between the man and the organization, during the period contested by the Internal Revenue Service, contained none of the legal hallmarks of an employer-employee relationship, according to the court. The court’s ruling in Kadimah Chapter Kiryat Ungvar v. Commissioner reaffirmed that, in order for your business or charity to owe FICA taxes or income tax withholding, your relationship with your payee must exhibit one or more legal indicators of an employer-employee relationship.

Kadimah Chapter Kiryat Ungvar’s tax troubles began when the IRS determined that the religious organization improperly failed to classify four workers as employees for purposes of FICA taxes and income tax withholding during part of 2004, and all of 2005-07. The non-profit religious organization ultimately agreed three of the men were employees but continued to contest the status of a fourth, Myron Schwartz.

Schwartz maintained a property once owned by the organization in Kings Point, NY. The organization argued that it sold the property in 2004 and that Schwartz was the homeowner of the property. The IRS contended, meanwhile, that Schwartz managed the property for the benefit of the organization, which it used as a parsonage for Schwartz’s father, a rabbi affiliated with the organization.

Relationship did not have principles of employer-employee arrangement

The Tax Court concluded that Schwartz clearly was not an employee. The organization did not control Schwartz’s activity, nor did the IRS provide evidence that the organization held a right to control Schwartz’s activities. Additionally, as the sole property owner, Schwartz had the opportunity to make a profit or suffer a loss on the property, whereas employees are generally insulated from profits or losses. Also, the court pointed out that, while Schwartz once was member of the organization’s board, he resigned in 1998, and his lack of a permanent relationship with the organization also indicated he was not an employee. While the organization paid substantial sums to Schwartz during the relevant period, the testimony indicated that the organization’s board believed it had a duty to support Schwartz, as much of the funds that created the organization were provided by the man’s father, Rabbi Schwartz. As a result, the court concluded the payments were support, not wages. The IRS overreached into trying to shoehorn Schwartz into employee status, the court determined. The agency “was trying to fit a square peg into a round hole,” the court wrote.

Determining who is, or is not, your employee is often straightforward, but sometimes can be tricky. It is exceptionally important that you get this classification right, though, as the penalties for failing to pay FICA or income tax withholding can be severe. To ensure your business has properly classified all of its employees and non-employees when it comes to payroll taxes, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They have years of experience helping business clients throughout New Jersey with employment and other tax questions. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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