Employer Payroll Taxes 101: Churches are Unique Employers
We recently posted Part 1 of Employer Payroll Taxes 101, which discussed general rules and regulations for employers and their payroll taxes. Houses of worship are, of course, a different kind of employer, and, as such, handle some aspects of payroll differently than other businesses
First, members of the clergy are generally “employed” by the church (meaning they’re not considered independent contractors), but are not subject to payroll tax withholding. FICA and Medicare taxes are assessed on each minister as Self Employment (SE) taxes when his or her Form 1040 is prepared. These special employees can elect to have taxes withheld, but it’s voluntary and characterized as income tax withholding. Withheld taxes are applied against all taxes owed on their personal tax returns, so the money can be used to cover SE tax obligations.
The second major variation for the clergy is the option of whether or not to designate an amount to be excluded from taxable wages to cover housing costs. These arrangements are common and typically fall into one of three categories:
- The church provides the parsonage as either a residential property it owns or a leased property that’s paid for the pastor, with little paid individually;
- The pastor leases his or her own residence and is granted a housing allowance as a part of the compensation package; or
- The parsonage family purchases a residence independently and arranges for a parsonage allowance from the employing church.
The arrangement between an ordained employee and the church holds immense flexibility, but some basic requirements exist, such as annual approval by the church governing body, consideration of the fair market rental value (which it can’t exceed), and related expenses (furnishings, maintenance, utilities, and even costs like pest control and lawn care).
Once the allowance is determined and approved, that portion of the minister’s salary isn’t subject to income tax and or reported as part of the gross salary on the W-2. It is, however, subject to the SE tax, so it’s important that the church provides the amount paid each year.
Church administrators, whether paid or not, have legal responsibilities in this entire process. These “trust fund” taxes make them trustees of that money. If they are responsible for approving or
writing checks, computing payroll, hiring and firing staff, preparing or signing payroll returns, or are officials of the church who can direct any of these tasks, they can be considered “responsible persons” under IRC Section 6672. If the church does not or cannot pay these taxes, the IRS can assess a “100% penalty” requiring that responsible parties personally make payments of the total tax due.
A bigger concern is this same 100% penalty for “responsible persons” can be assessed for each church employee – not just the clergy. Remember, it must be determined if your workers are employees or independent contractors. The decision not to designate nursery workers or worship leaders as employees may cost you for the taxes that should have been withheld but weren’t.
At Online Stewardship, we understand this decision shouldn’t be made alone and requires careful consideration. For assistance or more information on the matter, call us at 904-398-4747 or send an Email to lynn@onlinestewardship.com.
