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I am being supported by a church to create Bible class materials.

Resolved Question:

I am being supported by a church to create Bible class materials. These materials will be produced and sold to churches everywhere. This arrangement is new, so we are still figuring some things out.

If my income is represented with a W-2, then as an employee the church would own the copyright to what I produce. That being the case, would the sale of the materials create an unrelated business income for the church?

My concern with the church owning the copyright has to do with non-profit tax law. If the church owns the copyright, then only the church can sell the materials and/or the rights to distribute them. Would this create an unrelated business income for the church:

"unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization's exemption."



Also, could the church reasonably and properly classify me as an independent contractor?

"What should churches consider when classifying ministers as employees or self-employed?

Tests used by the IRS and federal courts would classify most ministers as employees for income tax purposes. Remember that most ministers have a dual tax status. Generally, they are employees for income tax purposes but are always self-employed for Social Security purposes with respect to their ministerial income.

The United States Tax Court applied this seven-factor test to ministers in 1994 when deciding if they were employees or self-employed for income tax purposes:

The degree of control the employer has over the details of the work.

Which party invests in the facilities used for the work.

The opportunity the worker has for profit or loss.

Whether the employer has the right to discharge the worker.

Whether the work is part of the employer's regular business.

The permanency of the relationship.

The relationship the parties think they are creating."

How would you recommend this arrangement be structured in order to keep things in good standing with the IRS?
Submitted: 1 year ago.
Category: Intellectual Property Law
Expert:  npvadvisor replied 1 year ago.

NPVAdvisor :

Lets start with the big five, in terms of jeopardizing the church's tax exempt status:

NPVAdvisor :

their net earnings may not inure to any private
shareholder or individual,

they must not provide a substantial benefit to private
interests,

they must not devote a substantial part of their
activities to attempting to influence legislation,

■ they must not participate in, or intervene in, any
political campaign on behalf of (or in opposition to)
any candidate for public office, and
the organization’s purposes and activities may not
be illegal or violate fundamental public policy.

NPVAdvisor :

So, in terms of the UBTI, as long as the funds were kept at the orgaNizational level and used to fuuther the church's mission, aimply selling for a profit, (or gain) alone is not an issue

NPVAdvisor :

The church can (for purposes of THIS PROJECT) classify you as an independent contractor, as long as you pay the self employment tax associated this does not differ (in effect) from the ministers being self-employed for Social Security purposes with respect to their ministerial income ... a best practice might however be to sure that the income for this project alone be a separate 1099, not only will it document that the property will be owned by the church, it will keep things "cleaner" all around for tax reporting and any after-the-fact documentation that might be needed

NPVAdvisor :

You concern about unrelated income, in my professional opinion, (as long as the intellectual property be owned by the church and when sold does not inure to any individual, but rather is used to pay operational expenses of the church and other things that further the churches organization purposes (which as per IRS is ...


the organization must be organized and operated
exclusively for religious, educational, scientific, or other
charitable purposes) ... is rightfully conservative, but I believe unfounded (again, qualified this way, as above)

NPVAdvisor :

I would structure this a a specific project, ... separate the project both by (1) not requiring anything other than a specific result and (2) issuing a separate 1099 for the payment ... regardless of WHO the person providing the service is

NPVAdvisor :

And finally, be sure that proceeds of any future sale by the church be used (and documented well) to further the religious purposes of the church and not inure to any specific individual in an excess way

NPVAdvisor :

Hope this helps

NPVAdvisor :

You may already have this, but this may prove to be helpful if you do not have it in this form:


Publication 1828 (Rev. 11-2009) - Internal Revenue Service

NPVAdvisor :

Let me know if you have any questions at all...

NPVAdvisor :

Lane

Customer: replied 1 year ago.

I have not come across these rules for determining UBI before. I have only found this basic explanation:


 


"Generally, a church creates UBI based on the analysis of these three elements: (1) the church receives income from a trade or business; (2) the trade or business is regularly conducted; and (3) the trade or business is not substantially related to the church’s exempt purposes."


 


Comments?


 


Next, what would be the implications and requirements of making me an independent contractor as opposed to an employee?

Expert:  npvadvisor replied 1 year ago.


Hi Jason,

Again, I don't think you have a problem here at all.

Especially, when looking at number three ... (Here the project IS related to the churches' exempt purposes).

BOTH in terms of it's content AND (as mentioned above) in using any proceeds of future sale by the church to further the church's mission.

Just be sure to document things that way, and you'll be fine

Lane


Customer: replied 1 year ago.

Okay, what would be the implications and requirements of making me an independent contractor as opposed to an employee so that I would hold the copyrights?

Expert:  npvadvisor replied 1 year ago.


If you are the pastor of the church, then i think it DOES have implications of what are called excess benefit transactions. (Benefits inuring to one individual)

I see nothing wrong with your, as an independent project, (outside of the organization) selling those rights to to other churches and organizations.

But when you cross the line from being paid by the church to develop these materials FOR THEM (over to developing the materials for yourself) is where you DO have an issue.

Make sense?
Customer: replied 1 year ago.

I am not the pulpit minister here. However, I am being supported for the express purpose of creating these materials and making them available, as well as filling the pulpit from time to time as needed. My family lives, and I maintain my office in a home supplied by the church. (This is also where I maintain the offices of a publishing company that I own and operate).


 


Would it be acceptable to be classified as an independent contractor? If not, why not? If so, what would be the tax consequences, and are there any considerations that would need to be taken into account in order to properly maintain that status with the IRS?


 


 

Expert:  npvadvisor replied 1 year ago.

Yes,

That was my original recommendation.

What this turns on is whether you want to maintain the intellectual property rights.

You just need to draft the contract between you and the church so say that you are licensing the property to them... AND that will then not let them be able to see them later.

IF you are being paid (and would need to word the contract accordingly) to develop the materials FOR the church, they tha will work as well... the church just needs to be sure not to lect any FUTURE sale be perceived as inurement.

1099 would be the way to do it either way.

... just be clear about what it is thats being contracted for,

Hope this helps

Lane
npvadvisor,
Satisfied Customers: 4539
Experience: 
npvadvisor and 3 other Intellectual Property Law Specialists are ready to help you
Expert:  npvadvisor replied 1 year ago.

Thanks Justin,

I'm sure you'll be fine either way.

Good luck with it.

Lane

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