By: Julie L. Bloss
Call the laborers and pay them their wages….” (Matt. 20:8 RSV).
Today it’s not that simple. Churches must not only pay their laborers, but also comply with numerous federal payroll laws.
WHY A PROBLEM?
Some churches fail to comply with federal payroll requirements.
*Difficult rules that are hard to understand.
*Turnover of volunteers leads to inconsistent record keeping.
*The erroneous belief that churches are exempt from payroll laws.
*A few unscrupulous consultants, who get churches to hire them by scaring them with bad advice.
*Incorrect information from well-meaning accountants and lawyers unfamiliar with clergy and church tax rules.
FACING SEVERE CONSEQUENCES
The Internal Revenue Code penalizes noncompliance with payroll rules. Penalties range from $50 for failure to issue a W-2 to 100 percent of the amount of taxes that should have been withheld from an employee but were not.
Misconception: Can volunteer church treasurers be penalized? Yes. Fact: Penalties apply to “responsible persons” whether or not they are paid. Responsible persons may include anyone who has the authority to write checks. Important: These people can be penalized even if they did not intentionally break the law.
COMMON PAYROLL PITFALLS
Let’s look at some common payroll problems and how to avoid them.
*Failure to issue correct W-2 or 1099 forms to church employees. Churches are required by law to issue W-2 or 1099 forms each year for everyone on their payroll. Employees, including most ministers, should get W-2 forms. Note: Most ministers have dual tax status. They are employees for income-tax purposes, but are always self-employed for social security.
Caution: Churches issuing W-2s and 1099s often make mistakes on them. Example: A minister’s housing allowance should not be reported on a W- 2. However, love offerings, bonuses, and expenses paid from nonaccountable reimbursement plans should be reported as income on a W-2.
*Failure to withhold income taxes from unordained employees. Although the law does not require churches to withhold income taxes from ministers’ pay, churches must withhold taxes from unordained employees. Important: Employees, with the exception of ministers, should complete a W-4 form. Tip: Obtain a copy of IRS Publication 15 (phone 800/829-1040),
which explains how to calculate withholding.
Option: Ministers treated as employees for income-tax purposes can voluntarily complete a W-4 authorizing the church to withhold income taxes. While this is not legally required, it may help ministers budget better.
Note: If a minister is treated as self-employed for income-tax purposes, he or she should not complete a W-4.
*Confusing FICA and SECA. Because most ministers have a dual tax status, churches need to understand the difference between the two types of social security taxes:
*FICA (Federal Insurance Contributions Act – social security taxes). Employers withhold FICA and make matching FICA contributions on behalf of employees.
*SECA (Self-Employment Contributions Act-self-employment taxes). Self- employed individuals, such as ministers, pay their own contributions to the social security system through SECA.
Warning: A church doesn’t do the minister a favor by withholding and paying FICA as if the minister were an employee. Fact: This arrangement is illegal, because ministerial income is always subject to SECA, not FICA.
Better: Churches can assist their ministers by providing a special pay supplement. Note: This supplement is taxable income and must be reported as such. Also: A SECA supplement should never be reported as FICA payments on a minister’s W-2, as this may result in miscalculated social security benefits.
*Incorrectly identifying independent contractors. Churches cannot avoid paying FICA for employees by calling them independent contractors. Problem: For the IRS, an employee is someone who:
*Performs regular duties for a church.
*Does it at the direction of a church.
*Works on the church premises.
Example: The IRS is unlikely to consider a full-time church secretary an independent contractor.
*Failure to follow federal reporting and deposit requirements. Churches may have three different kinds of taxes to report and deposit:
*The employees’ withheld share of FICA.
*The employer’s share of FICA.
*Federal income taxes withheld from employees.
Method: Churches withholding income taxes of FICA must file an employer’s quarterly tax return (Form 941). Note: Churches opposed to social security that have filed Form 8274 should use Form 1941E.
Complication: The rules about when and where to deposit the funds you collect are complicated. Tip: Consult the resources below.
WHERE TO GET HELP
Overwhelmed? Help is available, and since this article highlights only the basics, church treasurers will definitely want to study payroll rules in more detail. Here are some suggestions:
*Call Zondervan (800/727-3480) to purchase CPA Daniel Busby’s The Zondervan Church and Non-Profit Organization Tax and Financial Guide ($9,95), the 1991 Your Church Editor’s Choice.
*Attend a seminar by a group with expertise in church and clergy tax issues. Example: Christian Ministry Resources (P.0. Box 2301, Matthews, NC 28106; 704/841-8066).
*Obtain Church and Clergy Tax Guide, by Richard R. Hammar ($14.95), and subscribe to his newsletter, Church Law and Tax Report, both available from Christian Ministry Resources.
*Look into publications by CPA Manfred Holck (Church Management, Inc., P.O. Box 162527, Austin, TX 78716; 512/327-8501).
(The above material appeared in the January/February 1992 issue of Your Church.)
Christian Information Network