Setting up and managing payroll for a church can be complex. There are several questions a church should ask in order to stay compliant with tax and legal requirements.
Question 1: Does the church follow standard employment protocols?
Like any employer, a church should obtain and keep standard information and documents (including Form W-4 and Form I-9) from its employees.
The employer needs a Federal Employer Identification Number. Payroll withholding accounts need to be established at the federal and state levels.
Employment policies consistent with state law should be established and documented.
Question 2: Does the church properly distinguishing between “ministers” and “non-ministry employees?”
Someone may be acting as a “minister” if he or she administers sacraments, conducts worship services, is considered a spiritual leader, and performs management services in the control, conduct, or maintenance of a religious organization.
For ministers, a clergy housing allowance may be excluded from income for tax purposes if properly approved by the church in advance. Ministers are also exempt from income tax withholding, although ministers may enter into agreements with the church to have voluntary withholdings made. Some ministers are exempt from Social Security if they have obtained approval.
All other church employees are acting as “non-ministry employees” and should be treated as such, as further discussed below.
Question 3: Does the church capture all taxable income on its employees’ Form W2s?
Churches often give money to their employees outside of standard paychecks. This occurs in various forms such as through love offerings, Christmas gifts or bonuses, retirement gifts, below-market loans, loan forgiveness, or expenses reimbursed outside of an accountable plan. Churches may also allow a minister to use a church vehicle for personal use, or provide other fringe benefits. All of these issues may well be deemed taxable income by federal and state agencies, and should therefore be reported as income when applicable.
Question 4: Does the church withhold taxes when required to do so?
Churches often get confused because withholding rules are different for ministers and non-ministry employees.
Ministers are treated as “self-employed” for Social Security purposes, yet “employed” for federal tax purposes. They are exempt from mandatory tax withholding by the church, but must directly pay quarterly estimated taxes if taxes are not withheld. However, a minister may enter into an agreement with the church to make voluntary withholdings instead.
For non-ministry church employees, however, the church must withhold Social Security & Medicare taxes from employee wages, along with all applicable federal and state taxes.
Question 5: Is the church completing employment tax documents and filing them on time?
For the mandatory non-ministry employees’ withholdings, along with any voluntary ministers’ withholdings, the church must deposit withheld taxes in a timely manner and file accompanying tax forms when doing so.
The church must also issue W2s to all employees each year and 1099s to all contractors each year, along with the corresponding filings that must go to government agencies.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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