Across the United States thousands of college students are seeking internship opportunities for expansive experiences. For certain degree programs internship experiences are a requirement for the completion of the degree. Within biblical and ministry colleges this expectation is no different, and many churches open their doors to this opportunity to pour into young people and to have areas of their ministries expanded.
This decision to utilize interns can often be complicated by requirements from both the IRS and the Department of Labor (DOL). If churches are not careful, the decisions associated with interns could cause strenuous situations involving taxes and fees for both the intern and the church.
Do You Have an Intern or an Employee?
One large factor to consider in welcoming interns at your church is if they actually classify as an intern or an employee. An employee’s status is determined by the facts and circumstances of each specific role and not on the formality of offers. The Church and Tax Law Report defines an intern as “a person who works as an apprentice or trainee in an occupation or profession to gain practical experience and sometimes to satisfy legal or other requirements for being licensed or accepted professionally.”* With this definition in mind, the DOL has adopted a seven factor “primary beneficiary” test to determine if an intern should be classified as an intern or an employee. These factors help to weigh where the bulk of benefit lies to help classify.
The Defining Premise of the Primary Beneficiary Test: Who receives the benefit, the intern or the church?
If the bulk of the experiences and opportunities benefit the intern for their current schooling or expected career, then it is likely that they could be classified as an intern.
If, however, the bulk of the benefit lies with the church and without the intern the church would have hired additional employees for the work completed, then it is likely that the intern would most need to be classified as an employee.
After verifying that your intern can be classified as an intern by the DOL, the discussion of compensation comes into play. Many churches seek to bless their interns while not burdening the church with extra taxes and requirements. This often leads to churches offering interns small stipends or housing allowances as a way to bless them for their efforts.
Some churches offer these payments as tax-free compensation. In order to do this legally, the internship must qualify as an unpaid internship. To qualify as an unpaid internship, any stipends or tuition assistance offered to the intern must be considered nominal in nature. Merriam-Webster defines nominal as something that is trifling or insignificant.
If the internship does not qualify as an unpaid internship or if the church begins to compensate an intern beyond a nominal stipend, the church would have to meet the FLSA minimum wage requirements. All compensation, additional educational payments and non-employment mileage reimbursements would be considered taxable income to the intern and must be paid by the church according to national and state minimum wage requirements.
In an effort to both steward their church finances and support interns, many churches choose to pay their interns as an independent contractor. For the church, this lowers the cash requirements for paying the intern, but often for the intern this means an increased tax liability. This is due to all their intern income being subject to both income tax and self-employment tax (SECA taxes; employer and employee portions of FICA) at the end of the tax year. Many interns who are paid as an independent contractor are unaware of these tax ramifications.
Classifying and compensating interns must be navigated wisely to benefit and bless both the church and intern. If your church is considering setting up an internship, Wisdom would love to partner with your church in navigating the requirements. Contact Wisdom Over Wealth and stay tuned for more information on other factors affecting compensation and interns.
*Middlebrook, David. “Intern or Employee?” Church Law & Tax Report November/December (2015) Pages 22-23.