If you’ve ever experienced payroll errors first-hand, you know the extensive costs and time-consuming efforts that go into correcting them. Even the smallest of payroll slip-ups can snowball into serious, long-term issues and increased expenses, especially if those mistakes continually occur. But when mistakes happen, it’s important to determine what occurred and why, and then identify the root causes so they don’t happen again.
When you’re focused on your ministry, inattention to compliance issues can trigger costly fines, penalties, and lawsuits. Here are some common compliance missteps that churches should avoid.
Failure to account for differences in state or local
Many states and locality taxes have different reporting requirements than the federal wage. You must always comply with all applicable state and local requirements, in addition to federal laws.
Misclassification of a nonexempt employee
When the church makes mistakes in worker
classification (exempt vs non-exempt),
they open themselves up to action under
the FLSA for wage and hour violations.
Remember, many states have their own
wage requirements and overtime rules. You
should also be mindful of federal and state
laws for classifying independent contractors
Failure to calculate pay correctly
There are many ways to make errors on
paychecks, including failure to apply overtime
rules, mistakes in paid vs. unpaid leave, housing allowance, health care allowance, Medi-share plans, Social Security allowance, etc.
Missed payroll tax filings and deposits
Payroll tax penalties and fines apply if
your church fails to make timely federal
deposits. These penalties are quite
expensive—up to 15% of the past due
amount, depending on how many days late
the deposit is made.
Withholding FICA and Medicare taxes on ministers
Many churches are unaware that section 3121(b)(8)(A) prohibits the church from withholding Social Security and Medicare tax on the wages earned by a minister. It is the responsibility of the minister to pay the self-employment tax on his/her salary and housing allowance unless he/she has applied for self-employment tax exemption.
Not recording salary reduction 403b contributions
Employee’s 403b contributions reported in box 12 with a code E. The contribution amount is subtracted from box 1 of the W-2.
Employee prizes like gift cards and awards are necessary to report with income if they exceed a cash equivalent of $75 or more. For example, if an employee wins a $300 Visa gift card, that is enough to be reported with employee income. These are taxable wages, and never reporting items like this can result in some pressure from the IRS.
Clergy Financial Resources offers several options to help you with your tax questions or filing. We have listed three great options to get started.
Pro Advisor I Tax Support
This support service provides you comprehensive answers to your notice questions. This support service is available at a flat rate of $45.00 for each 30-minutes session.
Online W-2 or 1099 Filings
This service is design for churches that would like to simplify the process of filing the W-2 or 1099 Forms. When your year-end data is ready, enter it on the W2 data screen. Then relax! We’ll do the rest. Let us e-file, print, and mail recipient copies and send you a confirmation that it’s all done. W-2s have never been easier!
Full Church Payroll, Simplified
Payroll is complicated. There are a lot of tasks, laws, forms, and calculations. With so many things to remember, it’s easy to make a mistake. Let’s Clerry Financial Resources help with payroll compliance.
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.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101