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.
The good news is, most common mistakes are avoidable. Auditing, testing, reporting, and other checks and balances can confirm that your payroll is accurate the first time. We will share the top 14 most common payroll errors that churches. Contact Clergy Financial Resources for simple solutions for fixing and most importantly the ways to prevent them.
Each year sixty percent of the church W-2 forms are reported with errors. This is created by the lack of understanding of the reporting requirements of taxable income, how to handle various housing situations, reimbursement and allowance plans, and the elements of clergy compensation.
If payroll and the related taxes are not reported properly or withheld and remitted incorrectly, the IRS can impose severe penalties on the church and the treasurer. Ignorance of the law is not a defense in the eyes of the IRS or the courts.
- Withholding FICA and Medicare taxes on ministers and/or using the federal withholding tables to compute federal withholding.
- Paying tax-free housing or parsonage allowance to non-ministers.
- Not including fair rental value of employer provided housing as wages for
- Not recording salary reduction 403b contributions or other deductions in box 12. The 403b contributions must be printed in Box 12 of the W-2 with a code of E.
- Not including bonuses, taxable love gifts, wedding fees, etc. as taxable income on the W-2.
- Not including personal expenses of employees (ministerial or lay) which are paid by the church either to or for the employee in the employee’s taxable income on the W-2 and withholding the proper taxes. This may be for car allowances, any reimbursement not under an accountable plan, undocumented reimbursements, personal car payments, personal car gasoline, personal car repairs and maintenance, personal car insurance, personal life insurance, personal quarterly estimated taxes, and social security reimbursements.
- Paying for utilities, lawn care, repairs, etc. for the minister’s house in addition to the minister’s designated housing allowance. If they are not included in the housing allowance, then they essentially become taxable income to be reported on the W-2. If these are covered by the board designated housing allowance, they still must be reported to the minister for inclusion in self-employment income.
Note: For parsonages, if the church pays the utilities, these are deemed to be approved by the church. They must be reported to the minister for his inclusion as self-employment income in computing self-employment tax.
- Not including Group-Term Life Insurance in excess of $50,000 on the W2.
- Treating ministers as self-employed for income taxes.
- Not filing quarterly 941 payroll forms.
- Not issuing W2 or 1099-Misc. forms.
- Not complying with payroll tax deposit requirements.
- Church employees failing to pay self-employment taxes if their employing church exempted itself from the employer’s share of FICA taxes.
- Failure to provide Forms 1099-MISC to nonemployee recipients of $600 or more of annual income
If you can relate to any of the above situations, please contact us for further payroll review.